Uh oh. We’ve heard this before.
Despite the announcement of a EuroTarp package last weekend, worries about European banks’ exposure to Greece are still affecting money markets. To wit, the Libor-OIS spread:
The issue is that even after a handful of banks formally disclosed their exposures to European peripherals, there remains a degree of doubt in the market, especially given renewed concerns of a possible Greek debt restructuring.
RBC Capital Markets banking analysts Hank Calenti and Alastair Whitfield, for instance, have just placed their own question mark over German banks’ exposure, in particular. Here’s what they say:
We are not convinced that we are getting the full story from German banks with respect to their Greek exposure. The lack of meaningful disclosure may be partially responsible for continued pressure in the short-term moneymarkets. BIS figures show that German banks had €45bn in cash credit exposure (excluding contingent liabilities) to Greece, as of 31 December 2009. The largest German banks, which account for over 60% of German banking assets, have disclosed only 25% of their Greek exposure, by our estimates as seen in Exhibit 2 attached. We would not expect to find Greek exposure in the smaller German institutions and question where the remaining 75% of Greek exposure resides.
We believe that some German banks may not be disclosing the full details of their Greek sovereign exposure due to hedging via CDS contracts. We note that if Greece eventually undertakes a voluntary restructuring of its debt, CDS contracts may not trigger. As such, these banks would face wrong-way earnings risk from the need to write-down their Greek exposure and the value of the CDS contracts. We expect this to equal increased volatility in higher beta debt of German issuers.
‘Wrong way earnings risk.’ Quite.
Related links:
That Greek CDS trigger - FT Alphaville
Tensions rising in interbank markets - FT
Who’s exposed to Greece, bank edition – FT Alphaville
How bad in Europe? Your cut-and-paste guide – FT Alphaville