Greek Default Spells ‘Havoc’ for Banks a Year After Bailout
June 20 (Bloomberg) -- A year after European officials bailed out Greece, investors say the region’s banks haven’t raised sufficient capital or cut loans enough to withstand the contagion that may follow a default.
While European lenders reduced their risk tied to Greece by 30 percent to $136.3 billion last year by not renewing loans, writing down the value of debt and shifting it off their books, they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy, figures from the Bank for International Settlements show, leaving them vulnerable if the crisis spreads.
“The Greek debt situation certainly has the potential to create havoc with the European banking system,” said Neil Phillips, a fund manager at BlueBay Asset Management Plc in London, which oversees about $45 billion. “A Greek default and the ramifications of that would be too ghastly for Europe and the European banking system to contemplate right now.”
Insolvency FearsConcern that Greece was lurching toward insolvency drove the 48-company Bloomberg Europe Banks and Financial Services Index to a one-year low on June 16 and lifted the cost of insuring against default on the sovereign debt of Greece, Ireland and Portugal to record levels.
Analysts say contagion following a Greek default could play out like this: Refinancing costs for Ireland, Portugal, Spain and possibly Italy and Belgium would soar, thwarting efforts to rein in public deficits and putting states under pressure to restructure their debt as well; banks in countries with weak finances could face a run by depositors, while other lenders would see their capital eroded by credit writedowns; investors would shun equity markets and the euro and seek the safest securities. In a worst-case scenario, panic could freeze credit markets, as happened after the bankruptcy of New York-based Lehman Brothers Holdings Inc. in September 2008.
Market ‘Massacre’“If, after a year of discussion without conclusion, we conclude there will be a haircut, the next morning the market will massacre Ireland, Portugal and maybe other countries,” Federico Ghizzoni, 55, chief executive officer of UniCredit SpA, told journalists in Vienna June 16, referring to a Greek default.
The concern is already having an impact on European banks. BNP Paribas SA, France’s biggest bank, and rivals Societe Generale SA and Credit Agricole SA may have their credit ratings cut by Moody’s Investors Service because of their investments in Greece, the ratings company said on June 15. German banks could also be at risk from contagion, Fitch Ratings said last month.
Infection RiskMerkel said June 18 in Berlin that policy makers must make sure the Greek crisis doesn’t infect the rest of the euro region and spark a new global financial crisis.
“We all lived through Lehman Brothers,” she told a meeting of activists from her ruling Christian Democrat party. “I don’t want another such threat to emanate from Europe. We wouldn’t be able to control an insolvency.”
“The worst consequence of any Greek sovereign default for German and other European banks would be a sharp increase in general capital market and creditor risk aversion at a time when many banks are still in rehabilitation mode,” Michael Dawson- Kropf, a Frankfurt-based Fitch analyst, said in a May 25 report.
European banks are more at risk from a “disorderly” market reaction to Greek debt restructuring than any losses on their holdings of the country’s bonds, James Longsdon, a managing director at Fitch, said in an interview in Seoul today. Greek government debt held by European banks isn’t large enough to trigger an “insolvency event” at the lenders, he said.
Too Big to Shoulder“The direct hit from Greece is manageable because investors have had time to prepare, but contagion to other countries is the big risk,” Roehmeyer said. “If the crisis spreads to Ireland, Portugal and Spain, it would be too big for the banks to shoulder.”
The impact of credit-default swaps, which led to the near- collapse of American International Group Inc. in 2008, may be limited in a Greek default. Credit-default swaps on Greek sovereign debt cover a net notional $5 billion, according to the Depository Trust & Clearing Corp., which runs a central registry that captures most trades. That’s only 1 percent of the government’s $482 billion of bonds and loans outstanding, according to data compiled by Bloomberg.
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So, some 3 & half years into the Great Recession, come Depression and all the Politicians, Economists & TPTB have done, is kick the can a little further down the same road.
And now, can they "successfully" kick it a little further again or NOT?
Anyone got a little nudge, for our old "friend" Wile. E Coyote?
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