Photo: Metro Centric on Flickr
All eyes are on Greece again as the country continues its negotiations with private creditors and foreign leaders.The parties must agree to reforms that Greece must take before the debt-laden country can get access to desperately-needed bailout funds.
On March 20, Greece will have to make a €14.5 billion repayment. Without the bailout funds, Greece risks going into default.
And a default has been described by many as being chaotic.
What follows is a look at the entities exposed to Greece.
Moody's downgraded the credit ratings of 3 huge French banks in December, namely, Société Générale, BNP Paribas and Crédit Agricole, citing the banks' inability to raise capital in the open markets and deteriorating economic outlook. Back in September, Moody's cut the credit ratings of SocGen and Crédit Agricole because of concerns over their exposure to Greece.
Romania and Bulgaria's private and public sectors are exposed to the Greek banking sector. Greek banks account for 22 per cent of Romanian banking. Capital outflows are a major concern if the parent banks of Greek subsidiaries in Romania decide to cut exposure and drain cash from their international branches.
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).
- 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 utilization 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 nationalize 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 nationalized or bailed out would the Greek government really want to support Romanian and Bulgarian subsidiaries?)
The ECB is said to own about €40 billion in Greek bond debt after it had been buying Greek bonds in the open market for about a year. A 50 per cent write-down on Greek debt could cause €35 billion in losses to the ECB. The ECB had also lent an additional €91 billion to Greek banks.
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.
JP Morgan: There will be a flight to U.S. treasuries and yields will fall there as a result of renewed risk aversion. This will widen spreads on high grade corporate bonds.
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.
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 per cent of its GDP) and Bulgaria (8 per cent of GDP) will decrease.
Note: Data from 2010.