Why Greece & The Other PIGS Won’t Be Allowed To Default

The real reason why Greece and the other PIGS have been (and will continue to be) bailed out, is that the European banks have huge exposure to the debts of these countries.

European banks currently own 42% of Greek debts while foreign governments own 26%, the rest is owed domestically. A default today would lead to major losses for European banks as well as causing a significant contagion both via the credit default swaps (CDS) market and via the money market funds, especially those in the US which have huge exposure to the European periphery.

“It would be a mistake to think that the bailout is actually a bailout of Greece. Greece is a write-off. You can’t have the kind of debts Greece has with olive oil income – they have no industries to speak off, they have shipping but the shipping industry doesn’t pay taxes in Greece. So basically the bailout is actually a bailout of the ECB itself – because they already have a lot of paper of Spain, Portugal and Greece in their portfolios – and the bailout of the banks in Europe.” Dr. Marc Faber – 10 May 2011

The bailouts give these banks more time to divest themselves of the bad debt. By 2014 for example, European banks will own just 12% while foreign governments will own 64% of Greek debt. So by delaying the inevitable the banks will have managed to transfer the bulk of their losses onto European taxpayers. In the mean time of course the nation’s outstanding debt will have risen from €340 billion to around €400 billion.

What were “bank bailouts” have been rebranded “sovereign debt bailouts” to make them more palatable.

Countries most exposed to Greek debt

Greece may only represent 0.48% of global GDP but its total debt is a staggering €340 billion.

As this chart from the Bank for International Settlements shows, the German and French banks that are the most exposed to a Greek default with a combined exposure of around €53 billion.

In absolute (euro) terms, the German commercial bank Commerzbank AG is the most exposed to overall Greek risk – its shares are down more than 95% from their peak in 2007.

This exposure helps explain why Paris and Berlin have been among the loudest voices pushing Athens to undertake additional austerity measures and around €50 billion in asset sales.

European leaders maybe squabbling over the terms of the sixth instalment of rescue funds but they will keep the bailouts coming.


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