HSBC 2011 Annual Report Download - page 116

HSBC HOLDINGS PLC
Report of the Directors: Operating and Financial Review (continued)
Risk > Credit risk > Areas of special interest > Wholesale lending
114
The eurozone disclosure includes information
about our exposures to France, Germany and the
Netherlands as these countries are seen to have
considerable exposure to the sovereign debt of the
peripheral eurozone countries. In addition, these are
countries where our total direct exposure is greater
than 5% of the Group’s equity at 31 December 2011.
An analysis of loans and advances to customers by
significant countries is provided on page 111.
The on-balance sheet exposures disclosed in the
exposure tables below are presented based on the
appropriate IFRSs classification. Trading assets are
net of short positions as the fair value of the short
positions reference the fair value of the trading
assets. Derivative assets are shown gross and net of
collateral and derivative liabilities that reduce the
overall risk exposure.
Credit default swaps and off-balance sheet exposures
(Unaudited)
The Group purchased CDS protection on certain of
its holdings of Greek government bonds. The net
fair value of these CDS was US$0.5bn, and the net
notional value was US$0.8bn as at 31 December
2011. The CDS were transacted with banks with
investment grade credit ratings, and would pay out
in the event of default and certain other credit
events. There is no significant mismatch between
the maturity of the Greek government bonds and the
CDS protection. Other CDS contracts disclosed in
the tables below were principally entered into for
customer facilitation. These CDSs are mainly entered
into with banks and financial institutions where their
terms are typically drawn up in accordance with the
guidance set out in the 2003 ISDA Credit Derivatives
Definitions and the July 2009 Supplement. The credit
events that trigger the payout of CDSs may differ
as they are based on the terms of each agreement
between the counterparties. Such credit events
normally include bankruptcy, payment default on a
reference asset or assets, restructuring and
repudiation or moratoria.
Off-balance sheet exposures mainly relate to
commitments to lend and the amount shown in the
tables represents the maximum amount that could be
drawn down by the counterparty. In some instances,
limitations are imposed on a counterparty’s ability
to draw down on a facility. These limitations are
governed by the legal documentation, which differs
from counterparty to counterparty. In the majority of
cases, we are bound to fulfil commitments made to
third parties.
Summary on-balance sheet exposures to peripheral eurozone countries
(Unaudited)
Greece Ireland Italy Portugal Spain Total
US$bn US$bn US$bn US$bn US$bn US$bn
At 31 December 2011
Sovereign and agencies ...................................... 0.4 0.3 2.3 0.5 1.2 4.7
Banks .................................................................. 0.7 1.9 2.0 0.5 3.1 8.2
Other financial institutions and corporate .......... 3.9 3.2 2.6 0.1 6.0 15.8
Personal ............................................................... 1.0 – – – – 1.0
6.0 5.4 6.9 1.1 10.3 29.7
Eurozone sovereigns and agencies
(Unaudited)
During 2011, Portugal joined Greece and Ireland in
the list of the eurozone countries requiring rescue
packages to remain solvent. Greece required a
second support package, which was formalised as
EU leaders announced a three-year programme
totalling €109bn (US$155bn). In addition, the EFSF
rules were changed to allow it to buy bonds on the
secondary market, finance the recapitalisation of
banks and provide pre-emptive credit lines to
eurozone countries under pressure in debt markets.
The announcement of the second package was
followed by months of negotiations between the
parties to determine its details. Final agreement was
eventually reached in February 2012 ahead of the
March 2012 deadline for the euro bond payment of
€14.5bn (US$19bn) by the Greek government,
calming fears of a disorderly default. The total
support package has increased to €130bn
(US$172bn) and includes debt swap arrangements,
direct support by ECB and an additional haircut by
private debt holders.
In 2012, we forecast that the eurozone will
continue to experience slow growth or possibly
recession, with unemployment reaching record high
levels and households continuing to reduce debt.
We expect that the ECB, along with countries in the
eurozone, will continue to focus on resolving intra-
eurozone imbalances, rebuilding public finances,
improving fiscal discipline, strengthening the
banking system and managing cross-border risk.
Concerns of contagion of the debt crisis in Greece,
Ireland and Portugal to other countries, notably Italy
and Spain, are likely to persist, causing the risk
premium on most European countries’ sovereign
debt to remain high. The German economy has
demonstrated positive signs of stability and has