Citibank (NYSE:C) analysts say French and German banks are at high risk as their exposure to Greek debt could result in billion of euros in losses and write-downs for the financial institutions based in those countries.
Citibank said in a note to clients, “French and German financial institutions, by virtue of size and home currency bias, have greater exposure than others.”
According to the Bank for International Settlements, exposure for French banks is close to $80 billion, with exposure for Germany about $45 billion.
Some of the options to attempt to save Greece are a no win for banks holding Greek bonds, as the banks would still be accountable for huge losses even if they bonds are discounted, generating enormous write-downs.
There are two major problem underneath all of this, and that concerns Greece itself, and other nations facing similar problems in the European Union, although not yet at the level of Greece.
First, Germany especially has been pushing for Greece to make far more austerity moves in order to get help. That’s the reason there have been contradictory stories in the media from week to week that Germany supports a bailout then they don’t.
Much of Greece’s failure comes from the entitlement culture they’ve created, which now has risen up in protest against moves to cut back on it. Germany rightly notes if the entitlement culture isn’t addressed, throwing money at Greece will do no good, as the same problem will simply emerge again as people want what they think is owed them.
There’s a limit to what you can take from the productive and give to the unproductive; many countries in Europe are finding that out the hard way, and the productive countries are very wary of enabling Greece and other countries to continue on with those practices.
Possibly the more pressing issue is those other countries like Portugal, Italy, Spain and Ireland. All of them are in deep trouble, although Ireland has taken some measures to shore itself up more.
Anyone with an ounce of common sense knows the second Greece gets a bailout the others will come hat in hand to get theirs. There is no question that it will happen that way, and that generates the question of whether it will be discovered that those countries are far worse off than originally thought, just like Greece was.
What this all means is the legitimacy of the euro is at stake, and over the long term, the survival of the European Union as an operational reality.
There is no way the EU can save all these countries. That means they’ll attempt to get other nations outside the region to bailout the nations there. That isn’t going to happen.
People see the outrageous perks offered by these governments to their people which they are obviously unable to afford. If you think the bailing out of banks is controversial, wait till people are asked to bailout countries who have entitlement as part of their worldview. That’ll go over real good once all that is brought out into the open.
If some of the major banks of Europe residing in France and Germany are in major trouble from a small nation like Greece, what happens when heavyweights like Portugal and Spain are brought into the picture?
As billionaire investor Jim Rogers has said, it would be better to let Greece default to send a message to the rest of the countries in the EU that they take the euro seriously and countries need to get their financial houses in order.
Just like recessions of the past, they are prolonged by intervention from the government and central banks. What’s going to happen when intervention is applied to a number of countries? Hopefully we aren’t going to find out.
