Greece & US Banks: Where's Da Risk?

rcwhalen's picture

Mike Pento pinged me yesterday and asked about US bank exposure to Greece, etc.  The short answer is that most US banks don’t have any significant external credit exposure to foreign nations or obligors.  But the top US banking institutions and corporates do have loans/exposures to Greek entities that will be negatively impacted by an EU withdrawal and, with it, currency devaluation.  Think JPM, C, MS, GS, GE among top names that may have such exposures. 


In the 1990s, when I was working in Mexico as a consultant and newsletter publisher, that nation was still in the throes of dealing with currency crises and devaluations.  The dollar was the currency for business, lending and investing, with the peso a means of exchange only for local transactions.  Mexicans in all walks of life knew to immediately move their assets into cash dollars on payday, especially at the end of a presidential term in office. 


Nations such as Argentina today are still fighting that same battle in terms of debt and devaluation.  And this is the operative model for Greece and the other high debt, higher inflation nations of southern Europe as they exit the EU.  When Greece exits the EU, it will lose access to subsidies from the ECB and the global capital markets.  The cradle of human civilization will be living on cash with no access to credit or foreign exchange to fund imports besides what is earned from exports. Imports and debt service will compete for limited amounts of foreign exchange. 


If you are a foreign bank or corporate with exposure to any Greek obligor, the key question is whether that debt can be serviced in terms of foreign exchange.  Whether the obligor can pay in financial terms or not is of concern, but in a post-devaluation Greece, whether the obligor can access foreign exchange to make the payment becomes the gating item.


As the German government ponders how and when to cut-off the Greek central bank from further “foreign exchange” in the form of euro credit from the ECB, this decision augers at least a haircut for lenders with exposure to Greek  borrowers.  At a minimum, you will probably need to mark down the carry value of the exposure by the percentage currency devaluation after Greece exits. 


So say the new drachma is worth 25% of the value of the euro, the dollar or euro loans to Greek public or private obligors would needed to be written down 75%, unless the obligor had sufficient foreign currency assets outside Greece to remain current on debt service.  There are some significant Greek obligors with assets outside the country, but it remains to be seen how the evolving radicalization of the political life of the country will affect private obligors.


We will only learn about these currency risk exposures as and when the creditors disclose same to investors.  In the meantime, we’ll have lots of fun watching media spin their wheels over the game of “find the risk” since we really got no data.    But, again, the operative model here is Argentina and 1980s-1990s Mexico, so look for large % losses on any exposures that do exist.  But these same positions may also recover value depending on the medium term outcome in Greece. Thus are new markets made.


When the new Greek currency stabilizes, most likely with relatively high interest rates to defend the weak, tiny currency from global capital, investors will have some interesting opportunities.  Again, Latin America and Eastern Europe of the 1980s-1990s are key examples.  But banks and corporates with exposure in Greece will be on the losing side of this event and in a way we have not needed to think about in many years of artificial boom and now bust.  Call it the return of currency risk.



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Will To Live's picture

One hedge is to vacation in Greece after the fall.  Chill on the Ocean.  Hot and Cold running servants etc.

Buck Johnson's picture

Your correct,  your money will go far and you will be living like a king (with the pick pockets and crime around you).  Also it is possible that the Greeks will use the dollar, but it still won't get them out of debt, they might as well stay with the Euro.

gatorengineer's picture

I like the rumor that they will use the US dollar..... 

Piranhanoia's picture

There are 4 dimensions, the 4th being time.  The universe is random, and surprises everyone when your favorite star explodes and ruins the whole neighborhood for what we call an astronomical unit. (or 10)  If you are close enough, it happens for you in a few seconds.  If you are removed enough from reality, you will never see it.   Since the author chooses to ignore everything except happy talk. The author wants us to believe he is a Nostradamus. In this case, when much of the financial world says US banks are exposed in the trillions,  the illusion of truth accompanying what this person says is shown as a random event.

pmm009's picture

This is all crap.  Why didn't they tie access to the ECB liquidity facilities to some regime based on Target 2 and debt to GDP/GDP growth rates from the start.  The liquidity games are over.  Someone needs to take a Loss.  AND why don't they have a central FDIC, with localized regional mandates to merge in country institutions and secure deposits so the investors take a hit instead of transferring the risk right to the center?  People I talk to from Europe constantly want to compare Europe to the US.  This is a joke as well.  Europe may no longer be feudal, but it is operating much like the mercantilistic banker states of Renaissance Italy.  Investors in European assets need to take the losses ( at least a few Trillion ) and the politicians need to use this to restructure the system for success.

eatthebanksters's picture

It's nothing but a tempest in a teapot!

Clowns on Acid's picture

The article states the obvious but in a readable way = Devalued Drachma presents interesting opportunities for investors. Those with exposure to Greece will suffer losses due largely to currency deval.


lasvegaspersona's picture

another thought

When the USA looses the ability to print the world's reserve currency who in their right mind, realizing then the huge advantages that come with that 'exorbitant privlege', would then look to give some other nation the same advantage for another hundred years?

Some other system must be conjured. The tradition gold standard will be rejected due to the pain it caused in the past. Pure fiat only currency systems  will not be trusted EVER again. Guessing what a new system will look like is the quest for us all, all who wish to maintain wealth anyway. I think I'm seeing it through the fog.

Psyman's picture

Digital only.  "Credits."  Perfect tracking and attribution of all credit transactions world wide.  New World Order, yadda yadda.


Black market goes all barter.  Sex for drugs.  Weapons for drugs.  Etc.

lasvegaspersona's picture

I think US politicians have taken the attitude that they won't talk about that which cannot be fixed. They will just watch it happen and then declare 'who could have seen this coming'?  They will then likely blame (fill in the blank)....and ask us to trust them to fix things.

Obviously there is an entire cottage industry (wittness Zero Hedge and a hundred doomer blogs and letters) that have been discussing these problems even before 2008 but the fact that the average voter is still waiting for this bad 'business cycle' to correct allows politicians to ignore the coming financial disaster. They just need to stick together, laugh at guys like Ron Paul and when it comes they will all look surprised together. Hopefully enough people will have started paying attention by that day that there will be an outcry for wiser leadership and a more secure monetary system. 

It is possible.

Psyman's picture

I've said it before and I'll say it again, there is no European Crisis other than what has been engineered by the central planners.  This is not a meteor about to land on Europe, but an artificial crisis in an artificial system created by man and controlled by man.  Therefore, it can be manipulated by powerful men to achieve their goals.


Their goal is a closer economic union amongst European states.  Their goal is the eventual destruction of national sovereignty for each individual Europen state.  This "crisis" has been engineered to achieve that goal.


They're meeting again in June to discuss not the breakup of the E.U., but further and more tightly binding it together.


"Proposals are expected to include boosting the paid-in capital of the European Investment Bank and plans for 'project bonds' underwritten by the EU budget to finance infrastructure.

The aim is to agree ideas that can be formally signed off at the next summit on June 28-29."

crawldaddy's picture

disagree, one of the things you learn as you grow and move up in business/politics, etc is.. that there is noone steering the ship.  The lunatics really do run the asylum.


Psyman's picture

You can't see the forest for the trees.  You don't have the big picture or vision that the big boys have.  When the European Union started everyone said it was just a trade agreement.  Anyone claiming it would lead to a political union, single currency, and loss of national sovereignty was decried as a "conspiracy theorist."


How'd that work out?


Don't worry, we have all the time in the world.  You'll still be waiting for the "Grexit" 5 years from now.  It's not going to happen.


And, yes, the central planners are, well, planning.  You all throw around these terms but don't seem to comprehend what they mean and that they are relevant to real world constructs.  There are actually bureaucrats/technocrats that have the power and will to control the destiny of 500 million Europeans.  And they are doing it right now, as we speak.  And you fools are blind to it all because you can't imagine anyone being that intelligent, that manipulative, that competent.  But they are.

riphowardkatz's picture

What are you talking about? They are all bankrupt both financially and morally. When people are bankrupt they lose trust. when you lose trust productivity goes down the tubes. When productivity goes down the tubes there is less wealth and eventually less food. when there is less food there is more hunger, death, disease and so on. 

Oh yeah, you can say it a 100x over but it is a crisis. Yes the EU created the crises but who cares? They have no good way out so  at this point it might as well be a meteor.

disabledvet's picture

I once heard a guy complaining about "all the swearing going on" by exclaiming "I'm a Menonite gosh darn it!" The guy doing all the swearing retorted "i don't care if you're a meteorite you phucking asshole!" Maybe that's the problem with the EU?

Everybodys All American's picture

All you need to know ... The SEC finds no fraud at Lehman. Un friggin believable.

Winston Smith 2009's picture

"The short answer is that most US banks don’t have any significant external credit exposure to foreign nations or obligors."

Direct credit exposure perhaps.  But considering that their OTC derivatives exposure is unknown, how can it be said that they aren't exposed?

worbsid's picture

Most banks (by number) are local and don't do derivatives.  They typically go TU with bad loans for houses and merchants.

Bubbles and Busts's picture

The notion that the risks in the large banks remains hidden is especially important for investing. IMO, the last crisis proved that when risks are hidden, each bank is forced to assume the worst of their counterparites which increases liquidity risk and then solvency risk. We keep hearing that the banks have had plenty of time to reduce exposure but I'm not sure how anyone can be certain of that fact. 

Given the similarties with Mexico, is it too much to rule out the US creating some new type of Brady bonds for Greece to protect the large banks from losses?

blunderdog's picture

When talking about the US gummit, it's really hard to rule out ANYTHING.

But personally, I think the public's patience for bailing out the TBTF's is completely exhausted.  At this point, I'd expect our "tough on spending" (ha!) politicians to make a stand and force the banks to take some losses.

It's not like it matters--they're all zombies, anyway.