The economic and political turmoil in Greece may seem as small and far away as the footage of the Athens riots that have been flickering across the nation’s media screens, but in the world of finance there’s no room for parochial thought.
The debt crisis in Greece could ultimately impact every American due to the complexity and interconnectedness of the global economy. Financial markets are moving in anticipation that Greece will default on its debts, an event that in the worst-case scenario could trigger defaults in Portugal, Ireland, Spain and, perhaps, Italy and other debt-strapped European countries.
The cascade of bad debt would touch the banks, governments, corporations and private investors holding the bonds, and would like weaken the Euro, the currency of the European Union. At the same time, the American dollar would likely grow stronger and investors would rush to the relative security of U.S. bonds, putting downward pressure on yields. A strong dollar would increase the attractiveness of U.S. debt, but would handicap American companies that are big exporters by making U.S. goods more expensive overseas. This helps explain why the increasingly likelihood of Greece defaulting causes stocks of U.S. companies to slide.
The disintegration of the Greek economy, shows that in finance it’s a small world, after all. Prime Minister George Papandreou struggles to maintain political control and push through a five-year financial reform package needed to secure a $110 billion bailout from the EU. Meanwhile, the ratings agency Standard & Poor’s this week downgraded the creditworthiness of Greek debt to CCC. S&P estimates the country has $13.3 billion of government debt maturing between now and the end of 2013, and another $81 billion maturing in 2014.
Banks holding Greek debt are also feeling the sting. The ratings agency Moody’s announced yesterday that it will review three large French banks – Credit Agricole SA, BNP Paribas SA and Societe Generale for possible downgrades. Moody’s explained that the primary focus of all three reviews will be the banks’ credit exposures to Greek government debt.
“Today’s actions reflect Moody’s concerns about these banks’ exposures to the Greek economy, either through direct holdings of government bonds or credit extended to the Greek private sector directly or through subsidiaries operating in Greece,” Moody’s said.
Banks worldwide are exposed to Greek debt, including German banks ($26.3 billion); U.K. banks ($3.2 billion); and Italian banks ($2.6 billion), according to Bank for International Settlements data reported in the website Business Insider. U.S. banks hold about $1.8 billion in Greek debt.