Friday, October 29, 2010

Why Greece Won't Default (Yet)

. Friday, October 29, 2010


Thanks to the Euro, none of that’s possible and it’s not at all clear to me what the endgame here really is. For understandable reasons, German (and Austrian, Dutch, etc.) taxpayers don’t want to bail out the government of Greece. And also for understandable reasons, German policymakers prefer the European Central Bank to run a monetary policy that’s appropriate for Germany rather than one that’s appropriate for Greece. So Greece is stuck on a path to default.

This is all right, but it stops where the interesting analysis begins. If Greece defaults, who will it affect? Well, it will hurt the owners of Greek debt, as well as the owners of debt of other troubled Eurozone countries. Who owns that debt? Banks in Germany and France, mostly:

German and French banks carry a combined $119 billion in exposure to Greek borrowers alone and more than $900 billion to Greece and other countries on the euro-zone's vulnerable periphery: Portugal, Ireland and Spain.

Together, France and Germany's banking sectors account for roughly half of all European banks' exposure to those countries. Nearly half of the outstanding debt is with Spain, according to data from the Bank for International Settlements. The data include government bonds, corporate debt and loans to individuals.

So the integrity of the French and German banking sectors are vulnerable to a Greek default. Of course, the integrity of the U.S. and U.K. banking sectors are at risk to the collapse of French and German banks. The question is whether these countries want to bail out their banking sectors directly after a Greek default, or bail out Greece before a default. So far they have chosen the latter, just as the U.S. did following the Latin American debt crisis in the 1980s. If banks are able to reduce their exposure to a debt default, we might see that change. Until then, we likely won't.


Why Greece Won't Default (Yet)
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