REMINDER: Here's Who's Freaking Out Now That Greece Will Hard Default

Image: ap

A disorderly default in Greece just became a much bigger possibility, after PM George Papandreou announced a referendum on austerity yesterday.
If the Greeks vote no, this could be the end of Greece's participation in the euro, and spark contagion that could spread across Europe.
The Bank for International Settlements keeps a running tally of who has the biggest sovereign exposure to Greece. Although Japan, France, and Germany have all cut their debt exposure to Greece since earlier this year, they still stand to lose big if Greece decides austerity isn't worth it.
See who else has massive public debt exposure to Greece.

Spanish government debt exposure to Greece totals $502 million

Total lending exposure: $1.15 billion
Source: Bank for International Settlements

Switzerland's government debt exposure to Greece totals $529 million

Total lending exposure: $3 billion
Source: Bank for International Settlements

Belgian government debt exposure to Greece totals $1.9 billion

Image: AP

Total lending exposure: $10.5 billion
Source: Bank for International Settlements

U.S. government debt exposure to Greece totals $1.94 billion

Image: Wikimedia Commons

Total lending exposure: $8.7 billion
Source: Bank for International Settlements

Italian government debt exposure to Greece totals $2.4 billion

Total lending exposure: $4.5 billion
Source: Bank for International Settlements

UK government debt exposure to Greece totals $3.96 billion

Image: Wikimedia Commons

Total lending exposure: $14.7 billion
Source: Bank for International Settlements

French government debt exposure to Greece totals $13.4 billion

Total lending exposure: $56.94 billion
Source: Bank for International Settlements

German government debt exposure to Greece totals $14.1 billion

German chancellor Angela Merkel & Greek prime minister George Papandreou

Image: AP

Total lending exposure: $23.8 billion
Source: Bank for International Settlements

Greek banks hold $62.8 billion in Greek debt

Image: Wikimedia Commons

Source: Reuters

But banks in Europe have been working to cut their exposures

Source: Bank for International Settlements

Greek banks downgraded by S&P

Four of Greece's largest banks were downgraded by S&P in June. From Financial Mirror:

The rating agency said Wednesday that the financial profiles of National Bank of Greece, EFG Eurobank, Alpha Bank and Piraeus Bank “are exposed to significantly heightened risks as a result of deterioration in Greece's creditworthiness and Greek depositors' perceptions of a possible government debt restructuring.”

Moody's expected to downgrade Soc Gen, BNP Paribas, and Credit Agricole this week

French financial stocks have taken another hit today sparked by expectations of a Moody's downgrade of French banks this week. Back in June, Moody's had put three banks on review for a possible downgrade because if their exposure to the Greek domestic economy, in terms of sovereign debt and/or to the country's banking sector.

Romania and Bulgaria's banking sectors, and sovereigns, highly exposed to Greek banks

Image: AP

Romania and Bulgaria's private sectors, and their public sectors, are exposed to the Greek banking sector. If Greece's banking sector is slammed in a default, the result could be a lack of funding for the Romanian and Bulgarian sovereigns, private enterprises, or worse, according to Nomura (via FT Alphaville). From Nomura:

- A new Vienna Initiative: Despite an event in the Greek banking system those same banks are still required to maintain capital exposure into Emerging Europe. EBRD and EU provide support and other incentives to make this happen. Such a move however would be difficult and impose additional burdens on an already highly stressed Greek banking sector.

- Business slowdown (least bad outcome): Greek banks severely constrain lending in domestic subsidiaries as parent company funding crowds out domestic business. This is anti-growth for Romania and Bulgaria, though arguably it has already started to occur.

- Greek bank consolidation (bad outcome): Greek banks are forced to consolidate, perhaps into some form of good bank/bad bank set-up. Consolidation causes asset sales in Bulgaria and Romania. With limited foreign interest likely, government or domestic money would be needed, meaning net currency outflow. If a sale was not possible capital withdrawal would then be likely.

Capital withdrawal (very bad outcome): Greek banks are forced to draw down capital from subsidiary banks to shore up their own balance sheets. The capital flight causes balance of payments stress (requiring reserve utilization and in Romania’s case potentially tapping the precautionary SBA).

- Subsidiary default threat (very bad outcome): Removal of parent company support causes domestic banks to default but EBRD and the Romanian/Bulgarian government step in and nationalize or cause consolidation within Romania to absorb the bank.

- Outright parent company default (worst outcome): Parent company support is removed, capital is withdrawn, there is a fire sale of Emerging Europe assets. (Even if Greek banks were nationalized or bailed out would the Greek government really want to support Romanian and Bulgarian subsidiaries?)

Austria banks have significant positions in Eastern Europe

Image: Wikimedia

Austrian banks like Erste Bank, have positions in Eastern Europe which may come under threat if those countries slowdown as a result of a Greek default. At the end of June however, Raiffeisen Bank International kept its exposure to Greek sovereign debt at zero, according to Reuters.
From a Fitch comment on May 24 (via Reuters):

"However, their individual ratings also consider Fitch's expectation that impaired loans in some (central and eastern European) markets have yet to peak and -- in the case of Erste and notably RBI -- the banks' only modest capitalization if the forthcoming repayment of government participation capital and preparations for Basel III are taken into account,"

The ECB holds a significant amount of Greek debt

Image: World Economic Forum at Flickr

As of May JP Morgan (via The New York Times), estimated that the ECB owned about €40 billion in Greek bond debt after it had been buying Greek bonds in the open market for about a year. A 50% of write-down on Greek debt could cause €35 billion in losses to the ECB. The ECB had also lent an additional €91 billion to Greek banks. In the event of a Greek default, that debt may become worthless, and the ECB may be forced to recapitalize through taxpayer funds, from the rest of the eurozone.

If a restructuring does occur, the risk trade will be clobbered.

Image: wikimedia commons

JP Morgan: There will be a flight to US treasuries and yields will fall there as a result of renewed risk aversion. This will widen spreads on high grade corporate bonds as a result.

Other countries will have a much harder time entering the Euro.

Morgan Stanley: The Greek crisis will make the EMU much more concerned about who they let into the Euro zone in the future. They will start to check more economic criteria, such as external imbalances and budget positions.

ECB: Rate hike cycle may be stalled

The ECB kept interest rates steady at its last meeting. Intended to curb inflationary pressures on the eurozone, rate hikes may have to be halted if a Greek restructuring damages the continent's banking system.

Macedonia, and Albania will be hit too

Morgan Stanley: When the Greek economy slides, foreign workers from Albania and Bulgaria may lose jobs and stop sending home remittances. Also, FDI to Macedonia (7% of its GDP) and Bulgaria (8% of GDP) will decrease. Note: Data from 2010.

But Greece isn't the only euro nation under fire.

Click to read the sad story of why everyone's angry at Italy.