Fears of Greek default sparked bank response

Financial Times
September 16, 2011

If opponents of allowing Greece to default on its sovereign debt needed any more ammunition to argue that it is a wrong-headed strategy, this was the week that provided them ample firepower.

The prospect of a Greek bankruptcy – made more real by senior German officials openly discussing its likelihood at a time of unresolved brinkmanship with Athens over yet more austerity measures – forced the world’s largest central banks to open the taps to Europe’s financial sector at levels not seen since the darkest days of the Lehman Brothers crisis in 2008.

The connection between one of Europe’s smallest economies and France’s largest banks appears tangential. Those who support a Greek default, a near consensus among mainstream German economists, argue that Greece’s small size and lack of a systemically important banking sector means a collapse would have manageable consequences.

In its downgrade this week of Société Générale, the lowest rated of the three major French banking groups, Moody’s said the bank’s €1.9bn ($2.6bn) holdings of Greek bonds “are not a significant concern”.

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