Grexit Stoics German Banks Shrug at Greek Euro Exit

Greece’s possible departure from the euro zone would be manageable for many German banks, which have already rolled back their exposure in the troubled country.
A Greek hole in the euro zone?

If it were up to Bloomberg, Greece could leave the euro and return to the drachma. The terminals of the U.S. financial services company provide all sorts of information on stock prices, foreign exchange transactions or bonds – and also on the potential break-up of Europe’s single currency – to the financial markets.

Along those lines, Bloomberg set up its own “Euro Resources Center.” “Here you will find important information regarding a potential withdrawal from the euro currency area,” it says in reassuring words. It helps currency traders prepare themselves, should a new currency come into existence overnight; stockbrokers can for example learn under what abbreviation they will be able to find the securities of the newly-exited country.

On the computer screen, the so-called “Grexit” doesn't appear to be a technical formality anymore: A couple of clicks suffice to open up a world of new investment possibilities. Should Greece really return to the drachma, investment bankers will quickly come up with new instruments for such things as currency hedging.

“There won't be a lack of financial products,” said one analyst.

By contrast, risk managers at banks will need a little bit longer to calculate the new value of their loans - and whether they'll be repaid.

Banks not only will have to consider the new exchange rate, but also the fact that the new Greek currency likely will be strongly devalued. This will have possible effects on the ability of particular debtors to pay back their loans.

In Germany, Deutsche Bank, Commerzbank, Hypovereinsbank and NordLB are among the most exposed financial institutions with amounts in the low-to-mid hundreds of millions each.

The possibility of a so-called "Grexit" has once again become a reality of late, after Greece called for fresh elections that could see the leftist anti-austerity party Syriza gain power later this month.

German financial institutions are acting especially calm in light of the renewed debate. That's because they no longer seem to fear the outcome.

According to a media report, the German government sent a warning to Greece, where an election campaign is currently underway and the leftist anti-austerity party Syriza is leading in the polls.

The Germans made it clear that that the negotiations Syriza is striving for over another debt haircut would be tough, because they no longer fear a Grexit. One reason is that private debtors have already pulled out of Greece. Of the €322 billion ($385 billion) in national debt, €257 billion falls on public creditors – meaning European taxpayers.

“There is little credit exposure of German banks in Greece,” said Michael Kemmer, the managing director of the Federal Association of German Banks.

According to statistics from the German central bank, the Bundesbank, German banks only had exposure totaling €23.5 billion as of September 30. Of that, €15 billion falls on the KfW development bank, which is backed by the federal government. In total, Germany's taxpayers therefore have about €50 billion at stake in a Grexit, while claims of German banks only amount to €8.2 billion. Moreover, a majority of that is insured against default.

In Germany, Deutsche Bank, Commerzbank, Hypovereinsbank and NordLB are among the most exposed financial institutions with amounts in the low-to-mid hundreds of millions each. A study by JP Morgan found that French banks would be the most strongly affected by a Grexit, with the leading share at Crédit Agricole of €3.5 billion. But France also appears relaxed. At the major bank PNP Paribas, the word is that “Greece is behind us.”

But there are also voices of warning: “To think that Greece’s exit will now be considerably more manageable than three or four years ago is in many respects erroneous,” said Hans Redeker, head of Morgan Stanley’s foreign exchange strategy. “The greatest threat of a Grexit comes from the changing status of the currency union. Because it would no longer hold true that those who are in have to stay in.”

There also would be another great loser in the situation: the Greek banks. For them, even the expectation of a possible exit from the euro could be a major hit that would force them to seek government protection. Depositors and creditors would pull their euros out as quickly as possible in the expectation of a strongly devalued new currency.  That would leave the banks illiquid - and even the European Central Bank won't come to their rescue.

 

Laura de la Motte and Michael Brächer are correspondents in Frankfurt. To contact them: [email protected] and [email protected]