Everywhere we look lately debt crisis in the eurozone is in the news. One could watch videos of street protests in Europe all day long for an entire week and not run out of videos to watch. One day Greece is going to default, but Europe's leaders are trying to postpone that day as long as they can. The longer they kick the can down the road, the more the tension mounts. This debt crisis has been going on for months & months, so by now everybody is whipped up into an hysterical frenzy. The operative word is fear.
Is Greece the next Lehman Brothers? Will its default bring about the end of the world as we know it? Like most everybody else writing about Greece, I am completely unqualified to answer that question, so why not write a post about it?
As I see it, there are two issues from an American perspective.
- What is the exposure of U.S. banks to PIGS debt?
- What is the exposure of the U.S. economy to a sharp economic downturn in Europe?
As to the first question, the Wall Street Journal published the known figures. Things don't seem so bad. The problem is largely confined to Europe.
RBC Capital Markets compiled figures and did some analytical work to come up with who holds the sovereign debt of the three countries [Greece, Ireland, Portugal] German and French commercial banks are big players in all three countries, but the Eurocrats are even bigger holders.
The biggest holders of sovereign debt in the three nations are asset managers, sovereign wealth funds and central banks.
Here are RBC’s calculations:
Greece
Domestic banks: EUR50 billion
German banks: EUR17 billion
French banks: EUR11 billion
Italian banks: EUR2 billion
Spanish banks: 0
Rest of Europe banks: EUR9 billion
Rest of World banks: EUR1 billion
IMF/EU: EUR53 billion
ECB: 47 billion
Asset managers, sovereign wealth funds, central banks: EUR151 billion
If we add in Ireland and Portugal, the "rest of world" banks have a total exposure of 6 billion euros. That looks like good news, but who exactly are these asset managers and sovereign wealth funds? They are bondholders who will bite the bullet (or not) if Greece (or Ireland or Portugal) defaults. (I'm not worried about the Central Banks, they can always print more money )
In any case, at least one analyst says that U.S . banks' exposure to Greek debt is overstated.
NEW YORK, June 16 (Reuters) - U.S. banks' exposure to Greek debt may be much less than some investors fear, according to an analyst report on Thursday that landed as financial shares were staging a slight recovery from Wednesday's rout.
Nomura analyst Glenn Schorr said U.S. banks have largely hedged their direct exposure to Greek debt as well as counterparty credit risk.
Shares of large U.S. banks have dropped over concerns about a Greek default.
The Bank for International Settlements (BIS) has identified $32.7 billion of credit guarantees written by U.S. banks and brokers. The number spooked some investors on Wednesday, who were further worried by riots in Greece and fears that the country may not be able to pay its obligations.
Yet Schorr pointed out BIS data do not include the hedges that banks have put on since the Greek fiscal crisis erupted last year. Those would include purchasing protection from insurers, demanding collateral and making margin calls.
"While there is definitely some Greek exposure in the U.S. system, we think net exposure at the large U.S. banks and brokers is a whole lot less than the $32.7 billion," he wrote...
JPMorgan Chief Executive Jamie Dimon recently said his bank's collective exposure to Portugal, Ireland, Greece and Spain had declined by $5 billion since the end of March, to $15 billion. Government loans were less than half of that amount.
"A lot of the exposure is corporate," Dimon said. "We've been doing business in these countries for 75 or 100 years. We are not backing out."
If those holding this debt get clobbered when Greece defaults, that's OK with me. I personally don't hold any of Greece's debt, and I'm betting you don't either. If contagion spreads like wildfire, and these other European countries also default, well, that's just the way life goes, isn't it?
And you don't expect JPMorgan Chase to go out of business if they lose $15 billion, do you? $15 billion is chickenfeed. And I'm sure you've heard the news—they're too big to fail.
Assuming the European financial system melts down, the eurozone's economy will go down with it. No doubt there will be unforeseen effects on other economies, including that of the United States. American companies do a lot of business in Europe. However, a sharp downturn in the eurozone will only be one among a multitude of factors pushing the United States back into recession. So it would seem that the Greece hysteria among bloggers, on the gambling channel CNBC, and in the mainstream press is mostly unwarranted.
We've got bigger fish to fry. Almost 50% of Americans fear the U.S. will suffer a real, honest-to-god Depression within the next 12 months.
Greece has become the Charlie Sheen of international finance, a red herring distracting us from our own very real economic problems. If you read Michael Lewis' Beware Greeks Bearing Bonds, published in Vanity Fair last October, you will conclude as I did that the Greeks richly deserve whatever fate awaits them. And so do all the bondholders who financed them.
That's my completely unqualified opinion on the relative importance of what's going on in Greece.
Off topic and I don't know when your next oil report is but I wonder if you'd considered the data in the BP Statistical Review of World Energy 2011? There has been some discussion on TheOilDrum (in a recent Drum Beat) because of an article in The Rig Zone that highlighted the oil data in the review shows that the norm for the last 20-30 years has been an excess of oil consumption over oil production. I looked at the data spreadsheet for the review and the Rig Zone article looks correct. There seems to be no mixing of data in the spreadsheet (e.g. biofuels is actually recorded in a separate sheet). The discussion on TheOilDrum didn't really reach a conclusion or offer a solid explanation.
The data could be just bunkum (which it is, to an extent) or everyone is missing something. I don't think it would be possible for that deficit to be hidden for 30 years, even though it may balance the surplus up to then, since stocks would be pretty much depleted by now.
Does anyone have any ideas?
Posted by: Tony Weddle | 06/17/2011 at 08:14 PM