HSBC 2011 Annual Report Download - page 115

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Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
officials. This process enabled us to form a view of
the credit standing and the level of exposure that
the counterparties have to peripheral eurozone
sovereigns and banks. The majority of these
counterparties are located in France, Germany and
the Netherlands, where the exposures are disclosed
in aggregate below. Vulnerable counterparties were
identified, subject to enhanced monitoring and our
exposure was managed in a way similar to the
monitoring and management of direct exposures to
the peripheral eurozone countries.
The overall quality of the portfolio was strong
with most in-country and cross-border limits
extended to countries with high-grade internal credit
risk ratings. We regularly update our assessment of
higher risk countries and adjust our risk appetite
accordingly.
Exposures to countries in the eurozone
(Unaudited)
2011 was a turbulent year for the global markets,
dominated by the continuing eurozone debt crisis that
started with the global financial crisis in 2007 and,
by 2011, had developed into a severe sovereign debt
crisis. The measures taken by governments during
that period to avoid a financial collapse resulted in
higher debt levels, large fiscal deficits and, in certain
cases, social and political disruption. During 2011, a
number of eurozone countries came under severe
financial pressure and their ability to raise, refinance
and service their debt was put into question by
markets, as demonstrated by the record high spreads
during most of the year. Greece, Ireland and Portugal
were forced to seek support packages from the
European Central Bank (‘ECB’) and the International
Monetary Fund (‘IMF’) under strict conditions, while
fear of contagion to other eurozone countries forced
governments to reduce debt levels through austerity
measures that, at least in the short term, were seen
as the cause of slow growth for some countries and
stagnation in others.
Despite a number of high profile summits and
meetings the EU was unable to agree and implement
a strong coherent policy response to the crisis,
prompting fear of default or the exit from the euro of
one or more members. Under pressure during most of
2011, EU members showed an increasing willingness
to agree a structured common approach, but they also
demonstrated divergent opinions on the way forward
and on the measures to be taken. This resulted in the
three major rating agencies either downgrading, or
putting on the watch list for possible downgrade, a
number of sovereigns which intensified the pressure,
even on the stronger eurozone countries.
The ongoing sovereign debt crisis, slow
economic growth, dearth of market financing for
banks and private sector deleveraging severely
affected the eurozone financial system, increasing
the possibility of further banking stress in the region.
The banking sector within the peripheral eurozone
countries was particularly under threat as the credit
risk of domestic and cross-border exposures
increased significantly. This prompted calls from the
European Banking Authority (‘EBA’) and the IMF
for funding and liquidity support and/or the
recapitalisation of certain European banks.
The ratings downgrade of a number of eurozone
countries by major rating agencies in 2011 and
January 2012 was generally anticipated and was, in
most cases, not as large as feared, with the exception
of Portugal which is now rated below investment
grade. The downgrades are likely to have
implications for the ratings of European banks and
government guaranteed securities, as evidenced by
the downgrade of the European Financial Stability
Fund (‘EFSF’).
We continue to closely monitor events and have
stress-tested our capital position for potential
scenarios.
The tables below summarise our exposures to
selected eurozone countries, including:
• governments and central banks of selected
eurozone countries along with near/quasi
government agencies;
• banks; and
• other financial institutions and other corporates.
Exposures to banks, other financial institutions
and other corporates are based on the country of
domicile of the counterparty.
The following analysis of our exposures to
selected European countries is made voluntarily to
reflect developments in best practice disclosure.
Whilst certain analysis is subject to audit and
incorporated into the Group’s risk management
disclosure, it is not required for the purposes of
compliance with IFRSs.
Basis of preparation
(Audited)
The countries presented were selected as they
exhibited levels of market volatility during 2011
which exceeded other eurozone countries and
demonstrated fiscal or political uncertainty. Certain
of these countries also have high sovereign debt to
GDP ratios and a short to medium-term maturity
concentration of those liabilities.