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International banks headquartered in the Eurozone have $727 billion in exposure to debt from Greece, Spain, Portugal, and Ireland. The is 62% of the exposure to banks worldwide, according to a study by the Bank for International Settlements.

French and German banks were particularly exposed to the residents of Greece, Ireland, Portugal and Spain. At the end of 2009, they had $958 billion of combined exposures ($493 billion and $465 billion, respectively) to the
residents of these countries. This amounted to 61% of all reported euro area banks’ exposures to those economies. French and German banks were most exposed to residents of Spain ($248 billion and $202 billion, respectively).

The survey shows  for the first time the extent to which Europe’s largest banks could be severely and perhaps irreparably be damaged by a devaluation or default on the sovereign obligations of the four troubled nations. So far, the plans by the Eurozone and IMF to back paper from these nations, and perhaps others, has caused the creation of a $1 trillion rescue facility. A sell-off in the euro over the last several weeks indicates that the fund may not be adequate if a panic sweeps the capital markets because of concern that contagion would bring down the finances of all four nations. Each has embarked on plans to cut national expenses, but they cuts may be inadequate and they are being protested in each country.

The bank’s exposure may be one reason that Germany and France ended up supporting the Eurozone bailout fund. If their financial firms end up facing the kinds of losses that American banks did during the credit crisis, France and Germany mat need  to set up their own TARP funds. Several EU nations with smaller exposure might have to do the same thing. The obligations for the TARP-lake facilities could dwarf the commitments made by Eurozone nations to the bailout facility.

In other words, countries such as France and Germany will have to pay for the weakness of  Eurozone nations either through aid to the weaker nations in the alliance or direct aid to their own banks.

Douglas A. McIntyre