Eurozone Nations Can Bail out Their Banks Or Greece

There are several reports that Evolution Equities and Barclays have estimated the cost of a Greek default to Europe’s banks over three years . One of the reports, from the Guardian, says that the exposure, mostly in the UK, France, and Germany, is $240 billion. France has $75 billion in exposure and Germany’s is $45 billion.

That leaves the question of whether the two largest Eurozone nations want to bail out Greece or their own banks.

The news may be the reason behind the sudden urgency by the IMF and Germany to come to a conclusion about how to best aid Greece. While Greece has about $60 billion in debt due or in need of being rolled over this year, the country’s entire national debt is $400 billion. There is no hard proposal about how to aid Greece if its needs capital beyond 2010.

Germany in general, and its political leaders in particular, have been slow to agree on a solution to Greece’s problems. There has even been speculation that Germany would just as soon allow Greece to default as to help it. As the largest economy in the region, it might come out of a collapse of Greece nearly unscathed. German public opinion is strongly against a bailout which makes it a significant issue for elected officials, particularly Angela Dorothea Merkel, the Chancellor of Germany whose party faces elections in May.

France’s banks exposure to Greek debt is larger than Germany’s, especially given the size of its GDP. That makes France an almost certain advocate of aid to Greece. Germany, however, may believe that its three-year contribution to the Greek problem could be greater than the problem that a default would cause to its banking system. The Greek debt, even if it cannot raise capital, will probably be worth 60% of face value, according to some estimates.

That leaves Germany with the decision of whether it  should help its banks or Greece. German voters would almost certainly pick the banks.

Douglas A. McIntyre

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