The Calm before the Storm: The Greek Fiscal Crisis, not just a European Problem but a Global Problem?

Posted on April 29, 2010 by


Written By Orphe Pierre Divounguy

With US Banks’ stocks performing particularly well today, do we have nothing to fear from the Europeans’ hysteria over the Greek fiscal crisis?

So much has been said about the Greece economy directly affecting its neighbors and even hurting the Euro. Although it is a very valid argument, and a major cause of concern, I would like to go even further by suggesting that in our current highly interconnected globalized economy, this crisis could have significant global consequences, sending the financial sector reeling once again.

The Greek government 2010 budget deficit calculated at 13.6% of GDP is simply adding to the highest debt to GDP ratio in the EU (113% of GDP as of 2009). The rising debt has led to high borrowing costs, the inability to repay its debts and a severe economic crisis. The recent current downgrade of Greek bonds to “junk” status has made debt servicing even more unsustainable.

According to Barclays Capital, extrapolating from the International Monetary Fund (IMF) data, France is Greece’s biggest creditor, with $ 67 billion in holdings, including $ 9 billion held by the Bank of France. Germany holds approximately $ 38 billion in Greek bonds. Italy holds $ 27 billion, followed by Belgium, the Netherlands and Luxembourg.

Wait! Did I forget to mention that the United States financial institutions also hold Greek debt? According to the most recent data by the Bank of International Settlements (BIS), US banks hold $16.6 billion in worthless “junk” Greek bonds! The recent downgrades of Greek, Spanish and Portuguese bonds cuts the value of their bonds on the open market and hurts the US banks’ balance sheets.

With banks’ stocks rallying today, I could be wrong, but if I happen to be right, could this simply be the calm before the storm?