Credit Crunch Redux, Sovereign Style?

by: Alpha Author

The Economist provided a very nice chart last week (see Still in a Spin) breaking down the foreign bank exposure to Greek sovereign debt (as compiled and reported by the BIS).

Click to enlarge:

From the table, it seems that French, German, and Swiss banks have the greatest overall exposure to Greek government debt. But there is much more to it than that…

The figures presumably capture the nominal amount that foreign banks hold in Greek government debt expressed as a percentage of Greece’s total outstanding debt. However, to the extent that foreign banks have hedged their exposure through insurance purchased in the CDS market, the table will not reflect the true exposure of those banks.

We can’t quite know the extent of the exposure to Greek sovereign debt without knowing the exposure of banks (and non-bank financial institutions) to CDS positions on Greek sovereign debt. Since the CDS market is opaque and unregulated, my fear is that, aside from the obvious threat of contagion to the other PIIGS economies, the lack of transparency regarding exposure to Greek CDS contracts might result in a “credit crunch” redux. Might there be a sovereign equivalent to AIG (NYSE:AIG) or AMBAC (ABK) out there?

With the global economy in the midst of a still fragile recovery, I certainly hope not…

Disclosure: No positions