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12/01/2015

Are foreign banks really safe from a Greek collapse?

Greece and Euro Zone leaders finally announced a third financial agreement in Brussels on July 13, thereby preventing Greece from a “Grexit” of the Eurozone and from a financial collapse. This third bailout consists of €86 billion of loans provided by the European Stability Mechanism (ESM) and the International Monetary Fund (IMF) over the next three years (2015-2018) in return for tax rises and spending cuts.  While the worst case scenario has been avoided for the moment, it’s time for Sia Partners to review the exposure of foreign banks to Greece - with a special attention to Belgian banks -… and the challenges yet to come for the country and its creditors.

Foreign banks’ overall exposure to Greece has decreased since 2010

After the first joint agreement of the euro area and IMF on a financial package assistance in 2010, banks’ exposure to Greece has been declining continuously, but the trend has been different between years and when comparing countries. From 2010 to 2013, almost all the banks exposures of our sample decreased. Interestingly, between end 2012 and end 2014, German, American and British banks’ exposure rose to roughly speaking €10 billion. Moreover, these remain the most exposed to Greece. Compared to its colleagues, Belgian banks have never been seriously exposed and drastically reduced their exposure.

Figure 1: overview of the foreign banks’ exposure to Greece over the years 

Figures 2: European, British and American Banks’ total exposure to Greece in 2014-Q4

These amounts represent only a small part (<1%) of the total assets of the banks, not putting them in danger in case of a Greek collapse.

Figure 3: Exposition to Greece over the total asset value of foreign banks over the years

 

More than cutting investment, the composition of banks’ exposure to Greece has totally changed

Figure 4: Evolution of the sectoral exposition of banks to Greece

The foreign banks’ exposure to Greece has also varied in terms of sectors: in 2010-Q4, French, German, Spanish, British and American banks were mostly exposed to the Greek non-bank private sector. Today, it is the non-bank private sector which accounts for the major share of banks’ exposure for Belgium, France, Germany and Spain. Meanwhile, the Greek banking sector has become a substantial share for German, British and American banks.

Figure 5: Evolution of the sectoral exposures of German, British and American banks over the years

When focusing on Belgian banks, the trend has completely reversed since 2010: Belgian banks dropped Greek sovereign investment in favor of the private sector.

Breakdown of the saving plans

On one hand, since the first bailout in 2010, foreign banks seem to have secured and cleared their direct exposition to Greece. On the other hand, since 2010, €255[1] billion (which corresponds to 140% debt-to-GDP ratio in 2014) total loan have been lent by the IMF, European governments (among other financial supports; through the ESM) and the European Central Bank (ECB) to Greece and nonetheless, Greek financial situation is not improving, quite the opposite. This can be in part explained by the fact that €227,4 billion[2] have been spent on debt payments, bailing out Greek banks etc. which mainly means that less than 10% of the money has been used to restore a financial stability in the country.

Figure 6: On the €255 billion lent from the IMF, ECB and European Governments so far, where did the bailout go?[3]

As a general (non-)result, a third bailout of €86 billion of loans provided by the ESM and the IMF has been decided last summer to save Greece once again from a financial disaster. The exact amount of the ESM assistance will depend on the contribution of the IMF, but the latter firmly refuses to participate to the third bailout if an explicit agreement on a debt relief from creditors is found; the unsustainable Greek debt being owned majority by the Eurozone (including the ESM contributions):

Figure 7: On the total debt (€ 323 billion) of Greece; what are the creditors? 

Conclusion

Since the first bailout of Greece in 2010, foreign banks’ exposure to Greece has largely decreased and changed in sectorial composition.  However, after billions of loans provided by the IMF, the ESM and the ECB since 5 years, Greece had needed a new financial assistance package to avoid a financial collapse. Even if most of international banks have cleared their direct exposure to Greece, several question marks hence remain: what if a debt relief is decided; to which extent will it impact banks? The implication of the Eurozone (through the ESM), the IMF and the ECB, who own nearly 80% of the outstanding Greek debt, puts a veil on the real impact on European banks…


 

Click here to find out the full version of the article.

 

Sia Partners


 

 

[1] Macropolis

[2] Macropolis

[3] Macropolis

 
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