There are a lot of interlocking threads in the Greek saga. One consistent theme that ties all of the different threads together is the fragility of complex systems. In our globalized and complex world of finance and banking, every major actor has innumerable ties to other major actors such that devastating collapses in one entity ripple out in unpredictable ways that can bring any- and everyone down – including the most stable of companies, banks and sovereigns. This is what we learned during the Bear Stearns and Lehman meltdowns in 2008. But, it is also evident again with Greece.
I would argue that the Greek crisis started with Dubai in November. At the time, I wrote:
Despite asset market increases, the situation remains critical. Ireland, Greece, Spain, and Portugal are the clearest examples of countries which are storing up major trouble – and without the currency escape hatch – which makes these countries more akin to states like California, Michigan, or New York than the U.S. Sovereign credit ratings have been cut repeatedly in Ireland, Portugal and Greece. Back in March, everyone was talking about this. But, somehow these concerns have faded from view as equity markets have risen. The exogenous shock in Dubai brought the reality back into the spotlight.
The same is true in the Baltics despite their sovereign currencies because of the Euro currency peg. Here too credit ratings are being cut. This is the reason I continue to be more concerned about Eastern Europe than I am about Dubai. Yes, there could be a butterfly effect with Dubai here but contagion risk is more acute in Eastern Europe where large banks have much greater exposure than in Dubai. I see Dubai as Buiter does – a tempest in a tea pot; the real action is in Europe.
So, now that the crisis in Europe is underway, there are a few fault lines that I haven’t covered. One is alleged CDS exposure of the German Landesbanks to Greece. If Greece were to default, the Landesbanks, which have already lost tens of billions, would be on the hook for even more. Clearly, the German government is aware of this situation and this is certainly a major part of their political calculus.
Another fault line lies in the connection between Greece and the Balkans, where Greek banks are very active. For example, around the time that the Bear Stearns crisis was brewing in March 2008, the internet site Global Politician reported the following:
According to the Greek newspaper, Elefteros Topos, between the years 2000-2006, Greeks invested almost 263 million USD in their nascent neighbor. That would make Greece the second largest foreign investor in Macedonia. Of the 20 most sizable investments in Macedonia’s economy, 17 are financed with Greek capital. More than 20,000 people are employed in Greek-owned enterprises (c. 6% of the active workforce in this unemployment-plagued polity).
Greeks are everywhere: banking (28% of their total investment in the country); energy (25%); telecommunications (17%); industry (15%); and food (10%).
The foundations of the current presence of Greece in all Balkan countries – including EU members, Romania and Bulgaria – were laid in the decade of the 1990s.
The Greeks banks are heavily exposed in the Balkans and elsewhere in Eastern Europe. But, as I said in a previous post, Greek banks are using the ECB for low cost funding – with Greek sovereign debt as collateral. Therefore, a Greek sovereign debt crisis could impair the liquidity of Greek banks and therefore have knock-on effects in Eastern Europe through a reduction of credit availability as well.
One last fault line which is quite worrying is in Switzerland. Swiss Daily Tagesanzeiger has a good piece on this, which I have translated below:
A sovereign bankruptcy in Athens would hit the European banking sector with full force. Swiss banks in particular have invested heavily in Greece – for them, the risk is the greatest in Europe. But help is at hand.
The horror deficit of Greece is making the banks concerned. A failure to pay would hit first and foremost European institutions. “50 percent of foreign bank claims against debtors in Greece are to the Greek state. An Athenian bankruptcy would, therefore, hit other European countries and their banks hard, Citigroup strategist Giadi Giani said to the Financial Times Deutschland (FTD)."
In Greece, the fiscal situation is catastrophic. If the country does not find enough buyers for its bonds to reduce the deficit, it could lead to insolvency. Should no help come from EU countries or the IMF then, European banks would be threatened with massive writedowns, write the economists at Commerzbank.
Switzerland particularly affected
According to the International Monetary Fund (IMF), about two thirds of the debt of Greece is held by foreign creditors – an above average value. European Banks are particularly involved. According to data from the Bank for International Settlements, Swiss institutions, at around 68 billion francs, rank as one of the largest donors. Only the French banks, with 80 billion francs [of exposure] have stashed a bit more money in Greece.
But in relation to GDP, the risk to Switzerland, according to FTD, is the highest by far: According to Morgan Stanley economists [Swiss] commitment in Greece comes to almost twelve percent of Swiss GDP. France follows as the largest country in the eurozone at 2.5 percent.
The rest of the article talks about the prospect for bailout and so forth. However, needless to say, a Greek implosion is not as small an event as Paul Krugman infers when he looks at GDP alone. I hope this explains why.
Greece and its Investments in the Balkans: Trojan Horse or Reliable Partner? – Global Politician
Griechisches Finanzdebakel bedroht Schweizer Banken – Tagesanzeiger