Of Words and Waterfdalls (Part 3)

So why should we care about Greece?

To borrow a phrase, it’s the banks, stupid. Greek debt is held by a variety of European banks. Most of those banks—the public ones—are subject to mark-to-market accounting rules. So they’re already had to write down their Greek debt by 30-50%; their Irish bonds by 20-30%, and Portugese debt by 30-40%. So publicly traded banks like Deutsche Bank or BNP Paribas or Banco Bilbao have already taken a hit to their capital.

But government owned banks like the Landesbanks in Germany or the Cajas in Spain haven’t had to charge off their debt. And if they do, that could lead to a capital squeeze in Europe similar to the way that the sub-prime fiasco led to bank failures and tighter credit over here. It’s hard to get a loan to start a small business, here, in part because the banks are under pressure from the regulators to increase their capital standards, just at a time when the economy needs more small business loans.

A capital shortage in Europe would hurt, because the European economy is almost as big as the US economy. Also, a lot of their growth over the last decade has come from gains due to increased trade. The vast majority of international trade is done with neighboring states. If the Euro fails—or looks like it might—those trade gains could reverse, leading to a new round of Euro-sclerosis.

Greece matters because European banks matter. And European banks matter because Europe matters. So while Greece may seem to be a lightweight, it punches above its weight.

Douglas R. Tengdin, CFA
Chief Investment Officer
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