A little data here. A little data there. Someday we may actually know what banks are at risk in the European debt crisis. (Of course by then the crisis might well be over.)
Bank of America (BAC) reported its exposure today, May 7, in a filing with the SEC (Securities & Exchange Commission.)
Exposure to Greece: $193 million sovereign debt. Exposure to Ireland: $401 million sovereign debt. Exposure to Italy: $2.335 billion sovereign debt. Exposure to Portugal: $33 million sovereign debt. And exposure to Spain: $122 million sovereign debt.
The bank also provided total figures for each country that include sovereign (the debt issued by the national government) and corporate debt (debt issued by companies, frequently by banks).
The totals for Bank of America come to $1.3 billion for Greece, $5.2 billion for Ireland, $9.6 billion for Italy, $731 million for Portugal and $5.7 billion for Spain.
You know it would be an interesting study of human nature to see if humans can even learn from others failures. (Actually have seen studies that say on average humans don’t learn well from others mistakes, and history).
As ticktock put it, you have the lemmings marching off the cliff. Will the other “lemmings” even think that the same thing will happen to them if they keep on the same course?
It certainly doesn’t seem like it when you group a lot of those people together and call them a government.
Andante, excellent analysis. What would happen if Greece were to simply say “shove it” and default in the manner that some Latin American countries have done in the past? Who get hurts short, medium and long term?
Are German and France bailing out Greece so as to save their own banks? And why should the citizens of those two countries care what happens to banks that might fail. Yes, I know there would be a horrible immediate financial impact that would ripple through their economies but are their governments protecting their own citizens or merely watching out for the super rich who actually control the lending banks?
Also, Greece got into this mess doing exactly what virtually everyone other Western country is doing with the huge expansion of government and spending that is out of control. Greece is just the first lemming to reach the cliff’s edge. If all these countries, including our own, stay to the historical norm then lots of rhetoric will take place and taxes will rise but real spending will not decrease. A global economic collapse followed by waves of social unrest and outright anarchy in some places may be our not to distant future.
Greece is being asked to cut salaries & pensions and raise taxes. Admittedly some of this is their 13 and 14 month paychecks, retirement at age 53, and Greeks are famous for evading taxes. But it will be tough because of the sense of entitlement that has built up and the strong unions (a favorite topic in this blog). They can’t devalue their currency on their own or loosen their fiscal and momentary policies (this is what other countries would do) because they are part of the Eurozone. They will have to internally devalue by lowering wages and prices to try to make the economy more competitive so they can grow. This will be difficult to do especially in a recession. The only other example of this in the recent past is Latvia. They did this as part of a 7.5 billion IMF assistance deal in 2007-8. They had their currency pegged to the Euro so they couldn’t devalue and they cut public spending. The result was that their economy shrank by one fifth and their budget deficit got bigger. So the markets naturally are skeptical that the Greeks can pull this off since they are used to being relatively wealthy and are not as willing to tolerate austerity as the Latvians (as shown by the recent rioting).
Contagion is now also occuring on an economic basis. The weaker Euro and stronger dollar hurts US exports. Every 10% fall in the Euro affects the US economy by 30 bp as it takes off some of US GDP on the basis of exports. It impacts the European economy because banks aren’t trusting each other, aren’t lending to each other and you have liquidity contracted in Europe and risk of a knock on effect in banks. European banks are as interrelated as 16th century European royalty. This is at a time when the European economies are not robust – coming out of a recession (e.g. Spain has a 20% unemployment rate) and where the countries have built up a significant amount of sovereign debt.
The cure for all these problems is growth. The concern is that conditions are being set up where none of these countries will be able to grow their way out of their debt. And the markets have reflected that. As a first step the Greeks have to cooperate and take their economic medicine. But the EU also has to come up with a more creditable plan.
ECB is in a double bind. If it engages in quantitative easing by buying government debt from banks, they are basically increasing the money supply. Then they are looking at a weaker Euro. That could be a good thing for Europe’s economy but also hurts their credibility. The other option in lieu of quantitative easing is to admit they have a big problem and restructure the debt. Right now they say there is no chance they will do this but this is probably so the bond holders aren’t spooked and buyers will still come forward. Currently they have 85 billion of Greek debt, 95 billion of Spanish debt and 45 billion of Portuguese debt in European banks. Concern over this debt has the banks not lending to each other. They are borrowing from the ECB. (Sound familiar?) M. Trichet says the banks can absorb the shock from this crisis but it is not clear that this is true. Banks not lending to each other creates a psychological problem since everyone knows how this played out in 2008. You can watch how this is going by observing how much the European banks are using the ECB lending window.
When officials say nothing is wrong with Spain or Portugal, investors feel deja vu of Lehman and Bear Stearns.
Greece has been described as “doomed”. The rationale is: 1) a high budget deficit, 2) high debt, and 3) debt payments make up a huge portion of their budget deficit. Greek debt was down graded to junk status at 18% for 10 year. Portugal and Spain have 1 and 2 but not 3 yet. S&P cut its rating for Portugal to A- on Tuesday. This put the interest rate spread or gap between Portuguese and benchmark German 10 year bonds at 5.86%. This is the widest in years and shows a lack of confidence in Portuguese bonds. S&P lowered the Spanish rating to AA from AA+ saying that Spanish growth prospects are weak after the recent collapse of the credit fueled housing and construction bubble. Each down grade makes it more expensive for these countries to finance their debt and pushes them closer to the situation in Greece. This Wednesday, Moody’s warned it may cut Portugal’s credit rating 2 notches and the markets were spooked.
Robert,
“Grease”? (Greece).
The problem isn’t Greece. If that was all there was to it, the problem would be long gone. The problem is the answer to this question “Who’s next?”
The total debt of the Greeks is about 150 billion… ? Isn’t that about what the US prints up, and spends in 3 months on the wars ?
How in the heck can a pimple like Grease cause such a crisis in the economic world.. ?
I have no bad feelings toward the Greeks.
jbr, I think DB exposure is included.
“The bank also provided total figures for each country that include sovereign (the debt issued by the national government) and corporate debt (debt issued by companies, frequently by banks).”
Of course, your caution is well founded. Things like this usually end up much worse than people expect.
Jim:
Would comment on STD and HBC? Are they going to become dead banks walking at the end?
What if Europe has a Lehman like problem in the sense that lets say Deutsche Bank fails (because they have sovereign risk exposure) – what happens then? What is BAC’s exposure to DB? I think the numbers above are only direct sovereign exposures which hardly matter… is the same as people thought for subprime that it would be contained. You never know how credit issues spill over and cause systemic risk.