Greek CDS has been sky-high in recent weeks, reaching yet another record on Thursday.
If that isn’t enough to send jitters through the market, here’s something which is.
From BNP Paribas on Friday:
Exposure to Greece: who is most exposed? As Greek sovereign CDS spreads continue to widen and underperform today, we ask ourselves the question more pressingly about who is most exposed. We hate to break the news, but it is impossible to say. We detail cash exposures below from the information available to us. However, what will spook the markets is CDS / counterparty risk (our understanding is that Greek banks were active CDS players), and there is no way of finding out about these particular exposures. Therefore, as long as Greek sovereign and bank spreads remain under pressure, this will weigh on the wider European banking sector.
FT Alphaville has heard this rumour before. Greek banks selling CDS would make some sense. It’s essentially a win-win bet. If Greece doesn’t default on its debt, protection-sellers will likely earn a nice profit. If it does, well, the Greek banks will probably be crushed anyway.
In any case, the BNP Paribas note is a good reminder of the interconnectedness of the European market. To that end, here’s some more detail from the note: a table of foreign banks’ exposure to Greece constructed using BIS data.
Exposure in this case is likely to be a mix of sovereign, corporate and bank debt — and it could easily have been reduced using hedges (one reason European CDS liquidity is also increasing):
Size of exposure is not the only issue here, there’s also the issue of concentration. According to BNP, Irish, Austrian and Portugese exposure is concentrated in just a few banks.
In France, Greek-exposure is concentrated on Credit Agricole, as owner of Emporiki, and Societe Generale, which has stakes in Geniki Bank and Hellas Finance. German exposure by contrast, though ultimately high, is spread thinly between many banks, according to BNP Paribas.
And on the subject of European interconnectedness — two more tables: