The financial press expressed concern that a default of Greek sovereign obligations would badly hurt the balance sheets of American banks. The Wall Street Journal published a story with the headline: “US Banks Would Have Some Reason To Weep In Greek Tragedy.” That is almost certainly not true. Elsewhere in the paper Nomura analyst Glenn Schorr said US banks probably had hedged their exposure which is $32.7 billion in credit guarantees on Greek sovereign debt.
The comments about the trouble for the largest banks in Europe are similar to those made about American financial firm. The Bank of International Settlements says risk to French banks could be as high as $57 billion. Credit Agricole’s risk may be above $37 billion. Similar figures have been given for the largest German banks.
A Greek default may be the first in history in which the financial fallout is determined in the courts. That is, of course, impractical at least at first. The shattering results of a breakdown in Greece’s finances would cause a confused series of write-offs in loan values and those of credit default swaps. It will take years to actually total the damage as it did with the US credit crisis. Banks lost money on write downs in 2008 and 2009 and some times later found that worthless paper had actually regained value.
One of the legal issues about a Greek default will be what a default is. The wording of the agreements to insure debt many be clear. As the press has pointed out often, the definition of a default will be in question unless Greece simply repudiates its obligations. Instead it is likely the interest payments will be extended or lowered.
“The decision whether to trigger swaps lies with representatives from 15 dealers and investors under the International Swaps & Derivatives Association. The committee, which includes Deutsche Bank AG and the world’s biggest money manager BlackRock Inc., rules whether a credit event should be declared after a request is made by a market participant,” according to Bloomberg. This group is expected to be as unbiased as USGA officials at a professional golf tournament are and as objective as The Business Cycle Dating Committee of the National Bureau of Economic Research should be when it says a recession has officially begun or ended. Most of the parties who belong to the International Swaps & Derivatives Association are self-interested. That should not matter, but hundreds of billions of dollars are at stake, so it does.
The collapse of Greek finances and the battle over who has lost what financially will not be orderly as it was when Uruguay defaulted in 2003. That funeral had been well-planned over a long period. Maybe the nation was too small for most of the financial world to care.
But, Uruguay had an important advantage over Greece. The credit default swap market in 2003 was tiny compared to today. The Greek situation may end up being as well-known for that factor as anything else. Now that leverage has become one of the core problems for a bailout, the world of defaults has changed.
Douglas A. McIntyre