High Contagion Risks for German Banks if Greece Defaults

Seeking Alpha
May 25, 2011

Fitch Ratings sees high potential contagion risks for German banks if there were any restructuring of Greek sovereign debt. But it does not currently envisage any rating action on German banks as a direct result of their exposure to Greece.

A hypothetical 50% haircut of Greek sovereign exposure would not result in such a depletion of banks’ capitalisation that a rating action would automatically be triggered, even for the more exposed banks.

These either have strong owners, sufficient profitability or capital able to absorb potential losses without a structural impact on their business model, funding or franchise. The Long-Term Issuer Default Ratings (IDRs) of the more exposed banks will not fall below ‘A+’ (their Support Rating Floors) unless Fitch considers the ability and/or propensity of the German government or states to support them to have weakened.

Substantial amounts of Greek sovereign exposure lie with German government-owned KFW in its agency role servicing the government and in run-off institutions, backed by loss-absorption mechanisms from the German government, rather than with the commercial banks.

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