Eurotrashed: It's Not Just Greece

05/11/2010 9:35 am EST


Jim Jubak

Founder and Editor,

As the Greek debt crisis threatens to extend to Spain and beyond, even with a European Union bailout, seven big banks face significant risk.

The names are distressingly familiar: Fortis (OTC: FORSY), Dexia (OTC: DXBGF), Société Générale (OTC: SCGLY), BNP Paribas (OTC: BNPQY), ING (NYSE: ING), Barclays (NYSE: BCS), and Deutsche Bank (NYSE: DB).

Remember them? They were so neck-deep in the Lehman/AIG/mortgage-backed-assets debacle that they required government bailouts. (Deutsche Bank may quibble. It got its cash from American International Group (NYSE: AIG), so, technically, I suppose it didn't get government money. But since the AIG payout used cash from a government bailout of that company, I think it's a distinction without a difference.)

And now? Well, these companies all make the shortlist of European banks most at risk in the Greek debt crisis. The European Union's $1 trillion bailout doesn't do anything to change the risk of these individual banks. It merely puts in place a mechanism for a rescue.

Want to know how dangerous the Greek (soon to become the Greek-Spanish) crisis is? Look at these banks. (For more on Spain's progress toward crisis, see this blog post on my Web site.)

Want to understand why this is serious but not a replay of the chaos that followed on the collapse of Lehman Brothers? Look at these banks.

Want to know why investors are right to worry about contagion and the risk that other banks will catch what these banks have? Look at these banks.

OK, let's start with the data on how much money is at risk at each bank. (The Financial Times put this all together in a table in its Thursday paper.)

Fortis holds $5 billion in Greek bonds. Dexia holds $4 billion. Société Générale $5.2 billion. BNP Paribas $8 billion. ING $4.6 billion. Barclays $6 billion. And Deutsche Bank $2.6 billion. Altogether, that's a hefty $35.4 billion in Greek bonds.

Now, I know that seems like a lot of money, but in the scale of the recent financial crisis, it's not all that much. If you compare these amounts with what it took to bail out these banks in the aftermath of the Lehman bankruptcy, $35.4 billion is pocket change.

The governments of Belgium, the Netherlands, and Luxembourg bailed out Fortis to the tune of $16 billion or so. The Dutch government injected $13.4 billion into ING. France, Belgium and Luxembourg put $9 billion into Dexia. France bought $13.9 billion in debt securities from six banks, including Société Générale and BNP Paribas, and then later lent an additional $7.4 billion to BNP Paribas.

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Not the Only Thing to Fear, But a Biggie

But on another scale, these sums seem absolutely large enough to re-create the dynamic that made the post-Lehman crisis so devastating. The basis of the post-Lehman crisis was fear. Banks that had become accustomed to finding their capital in the financial markets by selling short-term commercial paper found themselves forced to borrow for shorter and shorter periods as buyers of bank debt tried to limit their risk by extending money for as few days as possible. Eventually, those few days turned into no days, and these banks found themselves unable to get financing at all.

Something similar is happening in the European banking sector right now. Banks are increasingly unwilling to lend to each other for any period longer than overnight. Of the almost $600 billion that turns over every day in the euro zone money market sector, 90% is now lent not for 90, 30, 14, or even seven days, but overnight. In normal times, the lending period averages between 30 and 90 days.
The fear that's behind the unwillingness to lend comes from massive uncertainty. Some banks look in trouble even if you look at just Greek debt and use a relatively strict but straightforward measure such as the ratio of Greek debt to tangible net asset value. (Net asset value is the value of a company's assets that remains after all liabilities have been subtracted. Tangible net asset value excludes intangible assets such as goodwill by assuming that such assets are worthless.)
At Fortis, Greek debt equals more than 60% of tangible net asset value. At Dexia, the ratio is 30%. Both numbers are high enough to make potential buyers of short-term paper from these banks shy away.

But even banks with much lower ratios, such as Société Générale, BNP Paribas, ING, Barclays, and Deutsche Bank—where Greek debt ranges from a little more than 10% (at Societe Generale) to just over 5% (at Deutsche Bank)—aren't worry free.

Bigger Worries Over Spain?

So far I've looked only at exposure to Greek debt. Spanish debt is increasingly looking like an asset to avoid—and there's a lot more of it floating around the European banking system than there is Greek debt.

French and German banks, of any in Europe, are the most exposed to the Greek debt crisis. Barclays Capital pegs the total exposure of banks in those two countries at $103 billion.

In comparison, Spain needs to roll over almost $300 billion in debt just in 2010. And because Spain has a relatively low savings rate and relatively large government and trade deficits, about 45% of Spanish debt is held by foreigners. (For more on the relative size of the Spanish and Greek crises, see this post on my site.)

If that exposure were spread evenly across the globe or even just across Europe, that amount of debt wouldn't be nearly so worrisome. But as the Greek numbers show, a few banks can wind up holding a large portion of the debt. The seven banks on my shortlist hold total Greek debt equal to about 34% of the total debt held by German and French banks.

Some banks could be on the hook for a bigger-than-average chunk of Spanish debt. If you could figure out which banks they might be, you would certainly avoid doing business with them. And if you couldn't pinpoint the risk, the most reasonable option would be to act as if everybody were a potential risk and not do business with anyone.

Even if you knew exactly what everybody's dollar exposure to Greek and Spanish debt was, you still wouldn't know who had bought hedges on some of that risk—or who had taken on even more risk by selling those hedges. Financial risk insurance, we learned during the Lehman collapse, is only as solid as the company selling it. And since this part of the derivative market is, by and large, private and opaque, you can't really know who is hedging and how much and with what counterparties. Refusing to do business with anyone or to buy anyone's debt, even the shortest-term debt, seems like an even better idea.

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Think Local, Fear Global

Local Spanish banks—not the big players such as Banco Santander (NYSE: STD), but the smaller regional banks—are big owners of Spanish government debt and are finding it just about impossible to raise capital in the financial markets. But this isn't as fatal a problem as it might seem, because these banks historically have raised much of their capital the old-fashioned way: From customers depositing money with the banks. These banks may be sitting on a large pile of Spanish debt relative to their size, but their actual risk may well be lower than a bigger institution such as Deutsche Bank that has a relatively weak deposit-gathering apparatus.

Thinking back to the post-Lehman crisis and looking at the current group of seven banks on this shortlist gives you a way to benchmark the troubles in Europe now. Several German state banks went under in the post-Lehman crisis, but their collapses didn't threaten the global financial system. Few of the seven institutions on my list play a big enough role in the global system of parties and counterparties that their troubles would cause a crisis in New York or Tokyo.

Two possible exceptions are Société Générale and Deutsche Bank. The banks were the top two recipients of cash from AIG (which, of course, got that cash from the US government) to settle derivative contracts. Société Générale received $4.1 billion and Deutsche Bank $2.6 billion, according to documents released by AIG last year. Those payments were larger than the $2.5 billion Goldman Sachs (NYSE: GS) received from AIG.

So as the European debt crisis moves to its next stage in Spain, I'd keep an eye on those two banks and on the two big international banks based in Spain: Banco Santander and Banco Bilbao Vizcaya Argentaria (NYSE: BBVA). I think the danger of contagion escaping the euro zone and infecting other financial markets is limited to just that handful of banks.

At least until the United Kingdom and the United States face their days of reckoning for their debt.

At the time of publication, Jim Jubak did not own or control shares of any company mentioned in this column.

Jim Jubak has been writing "Jubak's Journal" and tracking the performance of his market-beating Jubak's Picks portfolio since 1997 on MSN Money. He is the author of a new book, The Jubak Picks, and he writes the Jubak Picks blog. He is also the senior markets editor at

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