Greek Default Would Spell ‘Havoc’ for Banks

Bloomberg
June 20, 2011

A year after European officials bailed out Greece, investors say the region’s banks haven’t raised sufficient capital or cut loans enough to withstand the contagion that may follow a default.

While European lenders reduced their risk tied to Greece by 30 percent to $136.3 billion last year by not renewing loans, writing down the value of debt and shifting it off their books, they still have almost $2 trillion linked to Portugal, Ireland, Spain and Italy, figures from the Bank for International Settlements show, leaving them vulnerable if the crisis spreads.

“The Greek debt situation certainly has the potential to create havoc with the European banking system,” said Neil Phillips, a fund manager at BlueBay Asset Management Plc in London, which oversees about $45 billion. “A Greek default and the ramifications of that would be too ghastly for Europe and the European banking system to contemplate right now.”

German Chancellor Angela Merkel retreated last week from a confrontation with the European Central Bank that threatened to shove Greece into the euro zone’s first sovereign default, softening demands that bondholders be forced to shoulder a big part of a rescue. Questions remain about how any such burden- sharing agreement would work without prompting ratings companies to declare a default and whether Greek Prime Minister George Papandreou can persuade legislators to pass the austerity measures needed for a bailout.

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