The Known Unknown of Greek Debt

by Geoffrey Smith

Wall Street Journal
May 16, 2011

It is commonly assumed that a restructuring of Greece's sovereign debt will be a disaster for European banks. This may well be true, but not in the way that many expect.

On the bright side, there is evidence that euro-zone banks have used the breathing space afforded by official rescue packages to increase their capital and reserves, by a total of €220 billion ($310 billion), or 12%, from €1.8 trillion between the end of 2009 and March of this year, according to information from the European Central Bank.

At the same time, they have withdrawn to some extent from the euro zone's debt-troubled countries.

Total gross cross-border exposures to the economies of Greece, Ireland, Portugal, Spain and Italy, as held by euro-zone banks, fell by around 20% last year, according to Bank for International Settlements data, adjusted for exchange-rate effects.

The bad news is that exposures still totaled $1.7 trillion, with French and German banks on the hook for $240 billion to Greece and Ireland alone.

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