Greek banks: The first casualties

Economist
June 16, 2011

A messy end to Greece’s debt crisis seems ever more plausible. Standard & Poor’s this week slashed the country’s credit rating to the lowest notch above an actual default. Violent protests against a fresh round of austerity measures scarred Athens on June 15th. And dissent among European policymakers about how to involve private creditors in a new rescue package for Greece rumbled on.

Much of this debate centres on whether a restructuring of the country’s debt would spark wider contagion. The European Central Bank, the most vocal opponent of restructuring, thinks it would: on June 14th Mario Draghi, the ECB’s president-in-waiting, warned that any attempt to impose costs on Greek bondholders could lead to a “chain of contagion”.

The first links in that chain are the Greek banks. They have had a surprisingly good crisis given the country’s economic woes. Most were profitable last year. Several have managed to raise capital in recent months. Their vulnerability stems from their exposure to Greek government debt, which stands at about €70 billion ($100 billion), an amount that is roughly twice as large as their equity cushions.

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