13 May 2013

Reuters: Malta unlikely to follow Cyprus into crisis

Cyprus and Malta have a lot in common: Mediterranean islands enjoying 10 months of sunshine a year, they joined the EU in 2004, use the euro, and have banking sectors that dwarf their economies.

There are so many similarities that some investors have wondered whether Malta might follow Cyprus in needing a bailout to survive the region's economic crisis. But Malta's risk profile is far different from that of Cyprus, which received a €10 billion aid package last month aimed at preventing its collapse and a possible exit from the eurozone. On the basis of banking risk and its economy, it seems unlikely that it will be the next euro member - after Cyprus, Ireland, Greece, Portugal and Spain - to need rescuing.

Malta's banking sector is eight times larger than its GDP, about the same as it was in Cyprus before the rescue. This leaves the economy exposed to financial shocks. In Malta, the bulk of banking sector assets belong to subsidiaries of foreign banks which would be responsible for bailing them out in case of trouble. The assets of domestic Maltese banks, which would not be allowed to fail because the economy would collapse, add up to around 200 per cent of GDP. That is a large but not terrifying amount and the ratio in Cyprus's was twice as high.

In a recent assessment, the European Commission also expressed some macro-economic concerns, noting Malta's relatively high level of private debt, notably home mortgages. But it said that despite some overvaluation and possible oversupply, there was no immediate risk of a property market crash.

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