Tags: david | skarica | greece | debt

Out of the Frying Pan and Into the (Greece) Fire

Friday, 09 Apr 2010 02:36 PM

By David Skarica

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It’s a funny thing that investors in Greece are doing at the moment.

Recently, Moody’s downgraded some Greek banks because of exposure to the Greek economy and the weakness we would see in Athens due to budget cutbacks and the like.

Of course, what they failed to mention is that the Greek banks don’t even have the most exposure to Greek debt.

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According to a study by Swiss bank UBS, France and Swiss banks each have $79 billion dollars of exposure to Greek debt. Germany’s exposure is $43 billion. Estimates show that Greek banks only own about $50 billion to $60 billion in debt. Total Greek debt is about $400 billion.

Right now, we have seen outflows out of Greek banks into other European banks as Greeks fear weakness in these institutions.

Ironically, however, these institutions may have more exposure to a Greek default.

Also, we must remember that if the Greeks default it is more than likely to be on the foreign part of the debt. The Greeks are more likely to keep paying domestic owners as is often the case in partial defaults.

It kind of reminds me of when the British government nationalized Northern Rock, which was about to go under but the government guaranteed its loans and assets.

Many ran to Northern Rock from other banks because of this guarantee. This caused problems at many other banks.

If Greece defaults, many of those who moved to other banks for safety are in for a serious surprise.

They are jumping out of the frying pan into the fire.

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