Boom Bust Blog

Global growth has decelerated throughout the last decade, with continued weakness in global trade and investment. This was despite, or more aptly put – the inevitable result of the unprecedented amounts of unorthodox monetary stimulus put forth in unison by the world’s central banks. This weakness was widespread, distressing both advanced economies-particularly in the Euro Area and emerging markets and developing economies (EMDEs). In recent years, key indicators of economic activities declined in parallel and in unison, reaching their lowest levels since the global financial crisis. The contraction in the global trade of goods in 2019, and concomitant slowdown in manufacturing activities over the year, has caused a tentative stagnation of manufacturing output. Several economies have experienced feeble growth, with close to 90% of advanced economies and 60% of EMDEs going through varying degrees of deceleration in the past years. In response, major central banks have loosened their policies even further and many advanced economies lowered their interest rates close to zero and below.

The Four Waves of Debt Accumulation

The global economy has experienced four waves of debt accumulation over the past five decades. The first three waves have ended with financial crises in many emerging markets and developing economies. The fourth wave has evolved since the global financial crisis with government deficits and public debt spiking as a proportion of GDP as private sector debt is assumed by the governments as a result of bailouts, fiscal stimulus and liquidity provisions and default guarantees.

The Pan-European Sovereign Debt Crisis-2.0

This is not just a US issue. The research team at Veritaseum accurately predicted the Pan-European Sovereign Debt Crisis as far back as 2009-10. That malaise nearly broke up the European Union (first read circle), essentially contagion blowback from the Great Recession which emanated from NY/USA. Despite the damage that the entire European Union suffered, after a brief three year respite on the back of grueling austerity measures, the debt-to-GDP ratio which nearly brought the euro experiment to its demise, more than tripled to the beginning of 2020.

These unprecedented (again) spikes dept relative to economic output fail to even come close to telling the whole story. All of these figures don’t reach as far as mid-March, 2020 when the western world (China, Hong Kong, etc. had already started closing businesses and enforcing quarantines) shelter-in-home rules which effectively shut down each country’s economy. This, of course, put material and significant strain on economies worldwide. As a result, governments employed massive and unprecedented (yet again) fiscal and monetary stimulus packages to attempt to stem the tide.

This Is Really A Big Deal!

The Unemployment Problem in the US Makes The Great Depression Miniscule In Comparison

To put into perspective the efforts that will be needed to actually ad effectively stem the time, let’s look at the unemployment insurance claims rate in the world’s largest and most influential economy, just 3 weeks into the coronavirus lockdown.

If these numbers are anywhere near replicated in the EU, it is over! It is for this reason, among others, that the founder of Veritaseum asserts that the euro will fail in its current form. Click below to participate in the conversation from 4 years ago.

Debt is rising on every continent and especially in the business sector, which has spent the past decade ramping up its borrowing to previously unheard-of levels. The reason? Central bank-blown bubbles! With interest rates at historical lows at the tail end of the longest bond bubble in modern history, the private sector (both consumer, corporate, municipal and sovereign) backed the truck up to load up on as much cheap (read, economically mispriced due to central bank market tampering and synthetic lowering of interest rates) debt as possible.

The Corporate Debt of Just 8 Countries Amount to More Debt Than Can Be Paid By Global GDP

Almost 40% of the corporate debt in 8 leading countries, namely the US, China, Germany, Japan, Britain, Italy, France, and Spain, would become so expensive during an economic recession, it would be nigh impossible to service. In other words, 10-thousand businesses, with millions of employed, would have wagered with high levels of debt and lost, making themselves insolvent. The risks were elevated in the major countries that boasted systemically important financial sectors as global infrastructure, causing a situation worse than the last financial crisis. Remember, this is before the COVID-19 economic lockdown. Expect these numbers increase by at least 20 to 30% by the end of next quarter as the GDP levels around the world drop precipitously.

Moreover, several of EMDEs across Asia, Africa and South America, were affected by increasing private sector debt and high government borrowing. At first, it has gone from being hugely directed to investment spending to, more recently, being used to cope with the costs of health, education and welfare. Second, it is being more commonly borrowed from international, yield-famished investors anxious to lend to the developing countries at sky-high interest rates – but not in the countries’ native currencies, begging for currency rate risks and asset/liability mismatches on the part of the borrowers. See the Veritaseum's VeGold/VeLend solutions for two such countries suffering from hyperinflation and rampant currency risks by clicking below…

According to the Institute of International Finance, global borrowing has reached a total of US$253 trillion as of September 2019. This number is high. It is extremely high! The total of global debt is almost three times higher than the global GDP in 2018, i.e., of US$84 trillion. Linearly, this translates to $32,500 of debt per person worldwide and is anticipated to increase further, once the expenditures of the COVID-19 mitigation measures get fully underway – both dropping GDP by 10 – 30% worldwide while increasing debt by to 25%. It is now, and even more so in the extremely near future, literally and arithmetically, impossible for the world to pay off its debt!

Sovereigns have sought to narrow these deficits and reduce their debt stocks, either through lowering spending or expanding their economies. These attempts were proved to be a bit successful in developed markets. For instance, in Europe, the aggregate public debt by GDP ratio fell to 79% in 2018 from 85% in 2012 and about 60% before the crisis. However, despite these improvements, the level of public debt remained high overall. For instance, the public debt of Italy represents around 130% of GDP; this constrains the ability of government to support their economies during epidemics & pandemics and their range of policies after the on-going pandemic is over.

Consumer Debt – How The United States Maintains Its Global Economic Superpower Status

Impact of the COVID-19 pandemic

The COVID-19 pandemic, or from an economic perspective, the mitigation efforts to contain the pandemic, are wreaking havoc across many nations globally. The increasing human costs globally, and the necessary protection measures are rigorously impacting economies. The pandemic is expected to worsen the global economy by contracting it sharply – projected global growth is -3% in 2020.

Recession will hit the United States from the 2nd quarter in 2020

Increased volatility in the financial sector, widespread transmission mitigation, shuttered businesses, unemployment, spiking healthcare costs – all borne from the novel coronavirus - and falling equity values (down roughly 30%, then spiking back up to be down only 15% year to date – in less than 2 months) has already wiped out $1 trillion in household net worth in the US. Real GDP growth will be severely impacted in the second quarter as consumers will spend more cautiously, hold in business investments, and comply with bans on travel and public gatherings. Growth is anticipated to pick up only towards the end of the year. The country needs fiscal and monetary relief, although due to the extreme and unorthodox methods employed by the central bank during the last fiscal crisis only 12 years ago, the effectiveness of extreme fiscal measures are somewhat muted. The US Federal Reserve's liquidity measures and emergency cuts of 150 basis points will help to a certain extent. The net effect of a large drop in the oil prices will cut the growth adversely impacting the oil producers and suppliers – of which the US is the world’s largest in both categories. It is anticipated that US real GDP will contract at -5.9% in 2020.

A downturn is impending in Europe

The euro area economies and the UK were already in a poor state before the impact of the COVID-19 virus. The real GDP of the Euro area has performed very weakly in the 4th quarter of 2019, increasing just by 0.1% quarterly, and 1.0% annually. Germany's output was stagnant, while Italy and France have suffered contractions quarterly. UK's economy also hindered in the 4th quarter. The widespread of the virus will cause a serious damage through trade, travel and tourism, financial markets and sentiments. With its fragile economy, high incidence of COVID-19 and restrictions on activities, Italy is more vulnerable. Germany's economy will be severely impacted by the drop in exports to mainland China, especially with the steep decline in sales of light vehicles. Hence, it is expected that the Eurozone will face recession with a negative growth of real GDP (-7.5%). UK’s real GDP is also expected to contract at -6.5% in 2020.

China: First in, first out?

The economic damage due to supply-chain disruptions has been more widespread even though the incidence of the COVID-19 virus in mainland China is concentrated in Hubei province only. Work resumption is hampered due to labor shortages as large portion of them traveled back to their home during lunar New Year and is facing difficulties in returning to work owing to local self-quarantine requirements and travel restriction measures. The data for January and February showed a steep drop in economic activity in the country. A series of policies have been announced by the central government to curb the negative impacts of the pandemic on the Chinese economy. The concerned authorities have already indicated signs to intensify monetary stimulus packages and speed up investment spending. One such key measure is to coordinate work resumption across regions in China. According to IMF, mainland China's real GDP growth is projected to change by 1.2% in 2020, with the economy contracting Y-o-Y sharply in the first quarter with growth predicted to rebound in 2021.

Other large emerging markets: Few safe harbors

The outbreak of COVID-19 virus has created an even more challenging environment for emerging markets. Most of the emerging markets lacks the financial as well as healthcare resources to deal with this pandemic. Till date, Iran has been hit hard but this could change rapidly. Sluggish economic growth rate and lower commodity prices will impact the economic scenarios everywhere. Only a few will be immune to face the damage.

Bottom line

The rapid spread of the COVID-19 virus beyond mainland China has set the global economy up for the worst downturn since the 2008-09 financial crisis.

Hence, the global economic stagnation and widespread of COVID-19 combined with loose and fragrant fiscal policies of the respective governments has left the global financial system teetering under the burden of depreciating assets and rapidly building debt. The massive leverage developed over the years in an attempt to magnify the return on investment has now backfired; and with the decline in value of assets is, ironically, wiping out that very same investment. Moreover, this leverage was built through heavy cross-border investments via opaque instruments whose valuation during times of stress were truly unproven. Thus, the creation of the giant global banks, who act as linkages through these leveraged instruments, spread the “financial contagion effect” across the globe – from tiny countries in Eastern Europe to the financial powerhouses of Germany, China, the UK, Japan and the US. Based on the BIS (Bank for International Settlements) statistics on foreign claims of the banks in major European countries and the US, it is observed that the monumental foreign claims of many of these banks has dwarfed the GDP of their domicile countries, in some cases by several multiples, literally making them too big to effectively save.

The size of the banking system in relation to the size of the domiciled countries’ economy leads one to question the amount of damage any single bank’s, not to mention a daisy chain of several banks’, failure can wreak havoc upon a single economy. More to the point, since the economies are now so tightly interwoven, the damage that a single significant bank failure can wreck on multiple economies is quite significant. Basically, the bad assets of any sizeable bank with sufficient leverage can threaten several economies. A cursory glance shows that the risk is definitely present in several European sovereigns that can easily daisy chain across the continent and over to the UK.

This interwoven, poorly understood global financial system forms the roots of the financial contagion effect that can rock the entire system in an event of crisis erupting in one country/region. Crisis in Central and Eastern Europe can reverberate through the financial statements and stock prices of the banks of Western Europe. The potential collapse of Greece and the unfolding of the sovereign risk and structural issues of PIIGS have taken under its fold the entire Euro zone. Thus, it would be noteworthy to look into the cross border exposures of the banks of the major European countries and the US and even past such to some of the lesser known problematic regions to find out countries which are most exposed to the import of financial risk on the foreign claims of their domestic banks. For instance, it is commonly accepted that the CEE (Central & Eastern Europe) countries financial crisis has past and the larger, stronger countries’ banks that have significant claims on CEE GDPs are adequately capitalized in case things are worse than expected. Does that mean that they expect a PIIGS financial contagion to be contained? After all, several CEE exposed nations are also heavily exposed to PIIGS as well. What many analysts have failed to take into consideration is that the reserves they are eying for CEE risks have several contingent claims on them, with just CEE and PIIGS being a mere subset.

Foreign claims against PIIGS:

A major share of the total foreign claims against PIIGS is held by Spain and Italy banks. Nearly, 129.7% and 128.5% of the total foreign claims against PIIGS are held by Spanish and Italian banks. Expressed as percentage of GDP, the total foreign claims of Spanish banks against PIIGS amounted to nearly 115.4 of Spain’s GDP while the total foreign claims of Italian banks against PIIGS amounted to nearly 123.9% of Italy’s GDP. Of the total exposure of Spain’s banks to PIIGS, nearly 7.7% is in Portugal and 5.1% in Italy. Italian banks’ PIIGS exposure is largely spread between Spain and Ireland accounting for 3.6% & 0.7% of the total exposure.

Exposure expressed as percentage of GDP

The total foreign claims of Spain stand at 129.7% of its 2020e GDP, which includes 115.4% exposure to domestic country itself, 7.7% to Portugal, 5.1% to Italy, 1.5% to Ireland and 0.1% to Greece. Spain is followed by Italy who’s PIIGS exposure amounts to 128.5% of its 2020e GDP, with 123.9% coming from Italy itself, 3.6% from Spain, 0.7% from Ireland, 0.2% from Portugal and 0.1% from Greece.

Foreign claims against UK and US:

Although the English speaking super-powers – the US and the UK are trying hard to boost their sagging economies, the widespread of virus will likely to cause a serious damage through trade, travel and tourism, financial markets and sentiments. Looking at the cross border exposures of the banks to these countries, it is observed that Spain has the highest exposure to the UK amounting for 28.7% of its 2020e GDP, followed by Switzerland, Ireland and Netherlands with 23.7%, 14.6% and 10.6%, respectively.

Switzerland has the highest exposure to the US, which accounts for 65.2%% of its 2020e GDP, followed by the UK, Netherlands, Spain and France with 36.4%, 26.0% and 18.5%, respectively.

II.FOREIGN CLAIMS MODEL

In order to derive more meaningful conclusions about the risk emanating from the cross-border exposures, it is essential to closely scrutinize the geographical break down of the total exposure as well as the level of risk surrounding each component. We have therefore developed a foreign claims model which aims to quantify the amount of risk weighted foreign claims exposure for major developed countries including major European countries, the US and Japan.

1. Summary of the methodology

We have followed a bottom-up approach wherein we have first identified the countries/ regions with high financial risk either owing to rising sovereign risk (ballooning government debt and fiscal deficit) or structural issues including remnants from the asset bubble collapse, declining GDP, rising unemployment, current account deficits, rising gross debt, etc. For the purpose of our analysis, we have selected PIIGS, CEE, Middle East (UAE and Kuwait), selected African countries, China and closely related countries (S.Korea and Malaysia), the US and UK as the trigger points of the financial risk dissemination across the analysed developed countries

In order to quantify the financial risk emanating in the selected regions (trigger points), we looked into the probability of the risk event happening due to three factors –

a) government default

b) private sector default

c) social unrest.

The probabilities for each factor were arrived on the basis of a number of variables determining the relative weakness of the country. The aggregate risk event probability for each country (trigger point) is the average of the risk event probability due to the three factors.

Foreign claims of the developed countries against the trigger point countries were taken as the relevant exposure. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison.

The risk event probability of the trigger point countries was multiplied by the respective exposure of the developed countries to arrive at the total risk weighted exposure of each developed country.

2. Detailed description of methodology

Amid the global slowdown and spread of COVID-19 pandemic, some countries stand out to be more vulnerable and have been more severely hit than the others. We identified some of these problematic countries/ regions to be the trigger points which are capable of spreading financial risk to other countries. For the purpose of our analysis, we have selected PIIGS (Portugal, Ireland, Italy, Greece, Spain) , Central and eastern Europe (Czech Republic, Hungary, Poland, Slovakia, Estonia, Latvia, Lithuania, Bulgaria, Romania, Croatia, Serbia, Turkey, Ukraine, Russia), Middle East (UAE and Kuwait), China and closely related countries (S. Korea and Malaysia), US and UK as the trigger points.

Further, beside COVID-19 pandemic, the economic and financial issues surrounding each of the hard-hit countries tend to vary. While some economies are burdened with huge foreign imbalances (very high foreign private borrowing and high current account deficits), some are fighting with huge government debt and rising fiscal deficit. Structural issues resulting from bursting of asset bubble and rising unemployment have also been the major areas of concerns in some economies. Some countries have large government debt as % of GDP which is feeding the increased sovereign risk perception for these countries.

The income decline, job cuts and mounting debt burdens have also led to social unrest and political instability in some of these countries. Since there is a wide spectrum of issues and some issues impact a country more than the other, we evaluated the country’s relative standing vis-à-vis other countries on the following three risk factors.

Government default – Variables considered include government debt as % of GDP and fiscal deficit as % of GDP in 2020e
Private sector default – Variables considered include asset price decline (house price decline over last two years), unemployment (unemployment rate in 2020e), decline in income levels (real GDP growth and inflation rate in 2019 and 2020e) and foreign imbalances (foreign debt as % of GDP and current account balance in 2019 and 2020e)
Social unrest - Variables considered include general strikes, demonstrations, protests, unemployment, government policies, and political instability

The methodology for computing the risk event probability on account of each of the three factors is discussed below:

Government default – The risk event probability on account of this factor was arrived at using following steps –

Step 1 - Scores to the countries were given on the basis of government debt as % of GDP

More than 100% - 3

Less than 100% but more than 75% - 2

Less than 75% but more than 50% - 1

Less than 50% - 0

Step 2 - Scores to the countries were given on the basis of estimated government structural balance in 2020e as % of GDP

More than 10% - 3

Less than 10% but more than 7% - 2

Less than 7% but more than 4% - 1

Less than 4% - 0

Step 3 - Average of the scores arrived in the first two steps was used as aggregate score. Since US and UK are countries which are theoretically too large to fall, an adjustment factor of 0.25 was multiplied to arrive at their aggregate score.
Step 4 – On the basis of aggregate score, the risk event probability on account of government default was given to each country

More than 3.0 – 80%

Less than 3.0 but more than 2.0 – 60%

Less than 2.0 but more than 1.0 – 40%

Less than 1.0 – 0%

Private sector default – The potential of private sector default is influenced by a number of factors including asset price decline, declining income levels, rising unemployment as well as foreign imbalances, all of which are themselves influenced by a number of factors. We arrived at probabilities for each of these sub-factors and by giving weights to each based on their relative importance, we arrived at the weighted average probability for risk event due to private sector default.

The risk event probability on account of private sector default was arrived at using following steps –

Step 1 - Scores to the countries were given on the basis of change in house prices over the last two years

More than 15% - 3

Less than 15% but more than 10% - 2

Less than 10% but more than 5% - 1

Less than 5% - 0

On the basis of the score, the risk event probability on account of private sector default due to asset price decline was computed.

Score of 3.0 – 80%

Score of 2.0 – 60%

Score of 1.0– 40%

Score of 0.0 – 0%

Step 2 - Scores to the countries were given on the basis of expected unemployment level in 2020e.

More than 15% - 3

Less than 15% but more than 10% - 2

Less than 10% but more than 5% - 1

Less than 5% - 0

On the basis of the score, the risk event probability on account of unemployment was computed.

Score of 3.0 – 80%

Score of 2.0 – 60%

Score of 1.0– 40%

Score of 0.0 – 0%

Step 3 – The risk event probability on account of decline in income levels was computed on the basis of real GDP growth and inflation in 2019 and 2020e. Thus, two sets of scoring were done – one for real GDP growth and other for inflation. Scores to the countries were given on the basis of average real GDP decline in 2019, 2020e

More than 4% - 2.5

Less than 4% but more than 2% - 2.0

Less than 2% - 1.5

Positive growth - 0

Scores to the countries were given on the basis of average inflation in 2019, 2020e

If the average inflation rate is less than 0% (deflation) or is greater than 5%, the score is 0.5, otherwise 0.0.

The two scores were added and on the basis of the total score, the risk event probability on account of income decline was computed.

More than 2.0 – 80%

Less than 2.0 but more than 1.5 – 60%

Less than 1.5 but more than 1.0 – 40%

Less than 1.0 – 0%

Step 4 - The risk event probability on account of foreign imbalances was computed on the basis of foreign debt as % of GDP and current account balance in 2019, 2020e. Thus, two sets of scoring were done – one for foreign debt as % of GDP and other for the current account balance. Scores to the countries were given on the basis of foreign debt as % of GDP

More than 100% - 3

Less than 100% but more than 75% - 2

Less than 75% but more than 50% - 1

Less than 50% - 0

Scores to the countries were given on the basis of average current account deficit in 2019, 2020

More than 7.5% - 3

Less than 7.5% but more than 5.0% - 2

Less than 5.0% but more than 2.5% - 1

Less than 2.5% - 0

Weighted average of the two scores was used as aggregate score. On the basis of aggregate score, the risk event probability on account of foreign imbalance was given to each country

More than 2.0 – 80%

Less than 2.0 but more than 1.5 – 60%

Less than 1.5 but more than 1.0 – 40%

Less than 1.0 – 0%

Step 5 - While giving weights (based on their relative importance) to the probabilities for each of these sub-factors – asset price decline, unemployment, reduction in income level and foreign imbalances, we arrived at the weighted average probability for risk event due to private sector default.

Social unrest – The risk event probability on account of this factor was arrived at using following steps –

Step 1 – We created a social unrest model for each country (based loosely upon the CIA social disruption model designed at the behest of Henry Kissinger several decades ago) wherein we gave scores to the country on issues like general strikes, demonstrations, protests, unemployment, government policies, and political instability on a scale of 1 (minor) to 20 (critical).

Step 2 – The scores in the social unrest model were added to arrive at a total score. The social unrest model total was used to give scores to the countries

More than 35 - 3

Less than 35 but more than 25 - 2

Less than 25 but more than 15 - 1

Less than 15 – 0

Step 3 – On the basis of score in step 2, the risk event probability on account of social unrest was given to each country

Score of 3.0 – 80%

Score of 2.0 – 60%

Score of 1.0– 40%

Score of 0.0 – 0%

After arriving at risk event probabilities for a country on account of the three factors, the aggregate risk event probability for the country was taken as simple average of the three probabilities. However, another factor that is likely to influence the total risk of the country is the contagion effect in the form of fleeing foreign capital (due to deleveraging) by the crisis hit countries. Thus for each trigger point country, we computed the foreign claims of the other trigger point countries and multiplied the same with their respective risk event probabilities. The amount was expressed as % of GDP and for those countries where such amount exceeded 5.0%, 3.0%, 2.0%, we added 5.0%, 3.0% and 2.0%, respectively, to the risk event probability.

Looking at the risk event probabilities of the PIIGS countries, Greece stands out as having government default risk as it struggles with the twin problem of huge structural balance as well as already high debt levels. Ireland, on the other hand has the highest level of private sector default owing to weak economy hit by real estate bubble burst as well as high unemployment levels.

The computed risk event probabilities of other trigger points are summarized in the following tables:

Banks Segregation

Amid the rising debt and government borrowings, banks having maximum exposure in these regions are deteriorating and reaching a position of insolvency. Any downfall of such banks will impact several economies, causing a threat to their financial stability. So, we have screened and shortlisted some banks in Europe and Africa (few selected countries in East Africa) and segregated such banks on the basis of following steps:

Step 1: Excluded banks having market cap less than USD500 million

Step 2:

Excluded banks with assets as % of GDP less than 10%
Out of the excluded banks, included back banks with a Texas ratio of more than 25%

Step 3:

Excluded banks with a share price of less than $2 per share
Excluded banks with P/B of less than 0.5
Excluded banks with assets as % of GDP less than 20% but included back banks with Texas ratio of more than 35%

(We have not excluded banks of small illiquid countries with no ADR available)

Growth in 'Foreign Claims' and 'Gross Debt/GDP'

Total worldwide debt is expected to continue growing over the coming months, despite having just climbed to a fresh all-time high. Over the last 50 years, all the three previous waves of global debt accumulation has all ended with financial crises. The size of the coronavirus shock to fiscal policy will be comparable only to the second world war and the global financial crisis. For now, governments are ramping up fiscal spending to fight the pandemic, keeping basic economic architecture and keeping workers in their jobs. As a result, fiscal deficits will rise abruptly in the coming years. Yet, another decade of austerity to curb escalating fiscal deficits might not be feasible politically or socially. Looking all the factors and analysing the current situation we have created the two scenarios (the optimistic case and the base case) taking into consideration the increase in gross debts increase during 2008-2009.

In the optimistic case we have add the increase in growth rate of gross debts in 2008-2009 to the 2019 gross debt and in the base case we have add 35% more to the value of optimistic case taking into consideration the present situation prevailing worldwide.

III. Findings

Foreign claims of the developed countries including –Austria, Belgium, Denmark, France, Germany, Ireland, Italy, Japan, Netherlands, Portugal, Spain, Sweden, Switzerland, UK and the US against the trigger point countries were taken as their respective exposures which will result in transfer of financial risk. The exposures of each developed country were expressed as % of its respective GDP in order to build a relative scale for inter-country comparison. Risk event probability of the trigger point countries was multiplied with the respective exposure of the developed countries to arrive at the total risk weighted foreign claims exposure of each developed country.

The following table summarizes the total exposure as measured by the foreign claims against trigger point countries multiplied by the respective risk event probabilities.

Excluding exposure to the US and UK, Italy (largely to PIIGS) and Portugal and Spain (largely to PIIGS) stand out to have the largest exposure to losses on foreign claims. The total risk weighted foreign claims exposure is 78.8%, 73.1%, and 54.7% of the 2020e GDP for Italy, Spain, and Portugal, respectively. However, if we include the exposure to the US and UK, Switzerland and Ireland stand out to have the highest exposures expressed as % of GDP.

Looking at the risk-weighted exposure to PIIGS (the most fragile at present), countries like Italy, Spain, Portugal, Ireland stand out with exposures at 76.7%, 69.7%, 51.6% and 15.7% of GDP, respectively.

IV. Data Sources

Data of the foreign claims of the developed countries vis-à-vis other countries is sourced from Bank for International Settlements (BIS). Other macro- economic data is sourced from IMF or European Commission.