This morning’s downgrade of four Greek banks by S&P may not seem like a big deal, but it poses a massive threat to two emerging European countries, Romania and Bulgaria.
We’ve been writing about this for sometime. The banking sector in Europe is much more interconnected then people may want to believe, and a Greek default would do direct damage to the recoveries in both Romania and Bulgaria, which aren’t that strong to begin with. That’s because the Romanian and Bulgarian sovereigns, and private sectors, are funded by these Greek bank’s local subsidiaries, according to FT Alphaville.
Note, the banking sectors in these two countries significant exposures to Greece:
From FT Alphaville:
Further, Societe Generale, one of the French banks put on negative watch by Moody’s last night, has a significant presence in Romania and Bulgaria. Austrian banks also have significant exposures to these countries.
A default or hard restructuring in Greece, which is becoming more and more likely by the day, would hit that country’s banks, which would in turn hit Romania and Bulgaria, which could lead to further contagion in French and Austrian banks.
But just how bad could it get? The worst case scenario, from Nomura (via FT Alphaville):
Outright parent company default (worst outcome): Parent company support is removed, capital is withdrawn, there is a fire sale of Emerging Europe assets.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?)
Get ready for contagion.
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