The Guardian has UBS data on the exposure that European banks have to Greek sovereign debt; the grand total, of €93 billion, seems low to me, especially when you back out the €46 billion owned by Greek banks. Add up all the French banks combined and you get to €9.3 billion; Germany’s even lower, at €7.9 billion. All of these sums are entirely manageable and imply that the impact of a Greek default on European bank solvency would be de minimis.
But those aren’t the only numbers out there. Kash has found data (pdf) from the BIS which shows much larger exposures: $65 billion in France, $40 billion in Germany. (And another $40 billion in the US, which I’ll come to in a minute.)
But it’s worth looking at the raw data here — which is found on pages 102 and 103 of the PDF. The French $65 billion is made up of $57 billion in direct exposure, and $8 billion in potential derivatives exposure. And of that $57 billion, just $2 billion is held by banks: most is held by the public sector and the non-bank private sector. In Germany, too, direct exposure of banks to Greece is a mere $2 billion — and total derivatives exposure is even lower than in France.
The main conclusion I draw from all this is that no one really knows what the effects of a Greek default would be — but that non-Greek banks are unlikely to be the main vector of any contagion. And while Kash is worried about US banks’ derivatives exposure, I’m pretty sanguine on that front, too.
For one thing, $40 billion is not huge in terms of derivatives exposure — especially when we don’t know how much is held by banks and how much by deep-pocketed insurance companies and unleveraged fixed-income investors.
More conceptually, crises occur when banks suddenly find that debt they thought very safe is in fact very risky. That’s what happened during the financial crisis with structured products carrying triple-A credit ratings, and that’s what could happen again with European sovereign debt which carried a zero risk weighting under many bank-capital regimes. It’s emphatically not what’s happening with US investors who are writing credit protection on Greece, in full knowledge that a default is a real possibility.
That credit protection is an expensive hedge for European investors who got exposed to sovereign debt when it seemed much less risky than it does now. For the people selling the protection, it’s a speculative play that there won’t be a formal event of default — and when banks make speculative plays, they can generally cope fine if and when those bets go bad.
None of which is to say that a Greek default would be easily manageable. There’s those Greek banks, for one, which could act as contagion vectors — and of course there’s Spanish and Portugese debt, too, and a whole slew of other highly-correlated assets we can only guess at ex ante. What we do know, though, is that Greece has been a very, very slow trainwreck — even more than Argentina was. And when debt crises come slowly, they’re generally more manageable than when they come fast (think Russia in 1998).
So although no one is going to enjoy a Greek default, I suspect that in and of itself it won’t prove catastrophic. But I could be very, very wrong about that. And that’s a risk no one in Europe really wants to take.