Is This Bad Economic News a Sign of Greece’s Imminent Collapse?
Greece’s future is bleak, with a restructuring seeming more and more likely every day. Standard & Poor’s (NYSE:MHP) gave the nation the world’s lowest debt grade earlier this week. And today, S&P lowered its long-term counterparty credit ratings to ‘CCC’ from ‘B’ on four Greek banks: National Bank of Greece S.A. (NYSE:NBG), EFG Eurobank Ergasias S.A. (NYSE:EFG), Alpha Bank A.E. (PINK:ALBKY), and Piraeus Bank S.A. (ATH:TPEIR).
Swaps on Greece jumped up 47 basis points to an all-time high of 1,610 in London after the S&P downgrade. And the news has other faltering economies preparing for the worst as Ireland jumped up 27 basis points, now at 740, and Portugal rose 22 points to 764. For comparison, Germany is at 208 basis points.
While the European Central Bank and the German government continue to battle over what should be done, the situation continues to deteriorate, and should Greece is forced to take on any debt restructuring or maturity extensions, those actions would more than likely result in one or more defaults. ECB President Jean-Claude Trichet said he hoped to “avoid whatever would trigger” a default, but so much more than just the Greek economy is at stake, and everyone has their own opinion about how best to serve their own interests while dealing with the Greece problem.
Three French banks — BNP Paribas (EPA:BNP), Société Générale (PINK:SCGLY), and Crédit Agricole (EPA:ACA) — are under review by Moody’s Investors Service for a possible downgrade because of their exposure to Greek debt, either through holdings of government bonds or loans to the private sector. And with the news of their possible downgrade, which has yet to be determined, shares in all 3 banks were already hurting today, all down over 2%, and even the euro dropped from late Tuesday’s $1.4441 to $1.4354 today.
French banks are the most likely, outside of Greece, to be hit hard if Greece has to restructure — more so than Germany or England — because of the number of private and public sector liabilities, and are therefore taking the side of the ECB, which is trying to avoid restructuring at any cost. However, Germany’s option — to swap out old debt for new 7-year bonds — would likely result in default, hurting the Greek economy as well as anyone with a vested interest in it.