A Quick Guide To Who Gets Crushed If Greece Defaults

Explosion Acropolis

Photo: Wikimedia Commons

The situation in Greece is deteriorating this morning, with eurozone leadership unable to come to a decision on a second bailout, which has now been pushed back to July.Protests are ongoing in Athens, where leaders are trying to come to a deal on a second round of austerity measures, including privatizations and budget cuts.

The longer they take, however, the more public support swells against them, and greater the potential for Central European states to say no to a second bailout.

If no second bailout comes, Greece will likely be unable to pay its bills, and will default on its debt.

Japanese banks hold $500 million in Greek debt

Spanish banks hold $600 million in Greek debt

U.S. banks hold $1.8 billion in Greek debt

Italian banks hold $2.6 billion in Greek debt

UK banks hold $3.2 billion in Greek debt

French banks hold $19.8 billion in Greek debt

German banks hold $26.3 billion in Greek debt

Other Eurozone countries hold $15.7 billion in Greek debt

Banks in Europe have been working to cut their exposures.

Greek banks downgraded by S&P

Moody's puts Soc Gen, BNP Paribas, and Credit Agricole on downgrade review

Moody's has put the three banks on review for a possible downgrade. That's because they are exposed to both the Greek domestic economy, in terms of sovereign debt and/or to the country's banking sector.

From Moody's:

Paris, June 15, 2011 -- Moody's Investors Service has today placed the standalone financial strength ratings and long-term debt and deposit ratings of three French banking groups -- Credit Agricole SA (CASA), BNP Paribas SA (BNPP), and Societe Generale SA (SocGen) on review for possible downgrade.

The primary focus of all three reviews will be the banks' credit exposures to Greek government debt and the Greek private sector and the potential for inconsistency between the impact of a possible Greek default or restructuring and current rating levels. The review of SocGen will also assess the likelihood of future government support since our systemic support assumption is currently higher than the average for the French banking system.

Moody's also noted that exposures to Greece are to be included within the ongoing review for possible downgrade of Dexia Group's core operating banks.

Romania and Bulgaria's banking sectors, and sovereigns, highly exposed to Greek banks

Romania and Bulgaria's private sectors, and their public sectors, are exposed to the Greek banking sector. If Greece's banking sector is slammed in a default, the result could be a lack of funding for the Romanian and Bulgarian sovereigns, private enterprises, or worse, according to Nomura (via FT Alphaville).

From Nomura:

- A new Vienna Initiative: Despite an event in the Greek banking system those same banks are still required to maintain capital exposure into Emerging Europe. EBRD and EU provide support and other incentives to make this happen. Such a move however would be difficult and impose additional burdens on an already highly stressed Greek banking sector.

- Business slowdown (least bad outcome): Greek banks severely constrain lending in domestic subsidiaries as parent company funding crowds out domestic business. This is anti-growth for Romania and Bulgaria, though arguably it has already started to occur.

- Greek bank consolidation (bad outcome): Greek banks are forced to consolidate, perhaps into some form of good bank/bad bank set-up. Consolidation causes asset sales in Bulgaria and Romania. With limited foreign interest likely, government or domestic money would be needed, meaning net currency outflow. If a sale was not possible capital withdrawal would then be likely.

Capital withdrawal (very bad outcome): Greek banks are forced to draw down capital from subsidiary banks to shore up their own balance sheets. The capital flight causes balance of payments stress (requiring reserve utilisation and in Romania's case potentially tapping the precautionary SBA).

- Subsidiary default threat (very bad outcome): Removal of parent company support causes domestic banks to default but EBRD and the Romanian/Bulgarian government step in and nationalise or cause consolidation within Romania to absorb the bank.

- Outright parent company default (worst outcome): Parent company support is removed, capital is withdrawn, there is a fire sale of Emerging Europe assets. (Even if Greek banks were nationalised or bailed out would the Greek government really want to support Romanian and Bulgarian subsidiaries?)

Austria banks have significant positions in Eastern Europe

Austria banks, like Erste Bank and Rafeissen, have positions in Eastern Europe which may come under threat if those countries slowdown as a result of a Greek default.

From a Fitch comment on May 24 (via Reuters):

'However, their individual ratings also consider Fitch's expectation that impaired loans in some (central and eastern European) markets have yet to peak and -- in the case of Erste and notably RBI -- the banks' only modest capitalisation if the forthcoming repayment of government participation capital and preparations for Basel III are taken into account,'

The ECB holds a significant amount of Greek debt

The ECB is exposed to Greek debt, which it holds significant amount of on its balance sheet.

In the event of a Greek default, that debt may become worthless, and the ECB may be forced to recapitalize through taxpayer funds, from the rest of the eurozone.

If a restructuring does occur, the risk trade will be clobbered.

JP Morgan: There will be a flight to US treasuries and yields will fall there as a result of renewed risk aversion. This will widen spreads on high grade corporate bonds as a result.

Other countries will have a much harder time entering the Euro.

Morgan Stanley: The Greek crisis will make the EMU much more concerned about who they let into the Euro zone in the future. They will start to check more economic criteria, such as external imbalances and budget positions.

ECB: Rate hike cycle may be stalled

The ECB's current round of rate hike, intended to curb inflationary pressures on the eurozone, may have to be halted if a Greek restructuring damages the continent's banking system.

Macedonia, and Albania will be hit too

Morgan Stanley: When the Greek economy slides, foreign workers from Albania and Bulgaria may lose jobs and stop sending home remittances. Also, FDI to Macedonia (7% of its GDP) and Bulgaria (8% of GDP) will decrease.

Note: Data from 2010.

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