Portugal & Greece downgraded on risk of debt default

[Zanza2]

Did the integrationists really expect the whole Europe to develop common governance?  I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that.  It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.

English is already the de facto common language. However, that's "International" English, not British English. It has a much reduced vocabulary, doesn't use idioms and other subtle ways to express something. I remember reading how British diplomats faced problems in Brussels because everybody was quite comfortably speaking English, yet they somehow felt left out because they spoke a language that wasn't as readily understood. So Britain being eurosceptic really doesn't matter language-wise.

[The Minsky Moment]

I hear this all the time and I don't get it.  Seems to me the problem was that the buyers of PIIG debt forgot to price in the right risk.  There's no law that says all debt issued in the same currency has to carry the same interest rate.  US corporates carry different rates.  US munis carry different rates.

We are talking apples and oranges.  The apples are the problem that zanza posted about - in a currency union, by definition the value of the currency will not adjust to reflect merely local conditions, which means (like the old fashioned gold standard) that the only adjustment mechanism for a chronic current account deficit is deflation.  If that occurs in the context of high levels of private or public debt, the consequence can be a Fisherian debt deflation spiral.  In a fully integrated national economy, that response is tempered by fiscal transfers, internal migration, centralized bank rescue and support schemes, and possibly central guarantees of state or regional level debt.

[Zanza]

As it was discussed in this thread before, German bank exposure to Greece is manageable apparently. Exposure of the government and central bank is much bigger.

http://www.spiegel.de/international/europe/0,1518,765318-2,00.html

[...]Greece's biggest creditor in Germany is the government-owned KfW development bank. So far, the government's all-purpose bank for urgently-needed cash injections has approved loans worth €8.4 billion to Athens, which were paid out as part of the European and IMF rescue package. Since Germany's federal government acted as the loans' guarantor, the finance minister would have to make up for any shortfalls. If Greece gets a 50 percent haircut on its loans, that would cost the ministry more than €4 billion.

German Banks' Exposure to Greek Debt

Commerzbank 2,900
Deutsche Bank (including Postbank) 1,601
DZ Bank 1,002
Landesbank Baden-Württemberg 1,389
Landesbank Berlin 364
HSH Nordbank 295
NordLB 197
BayernLB 121
WestLB 97
Landesbank Hessen-Thüringen 78
FMS Wertmanagement (bad bank for Hypo Real Estate) 7,400
Erste Abwicklungsanstalt (bad bank for WestLB) 1,400
Kreditanstalt für Wiederaufbau (KfW) 8,400
Source: Company figures, some values are estimates

With €7.4 billion in loans to Athens, FMS Wertmanagement is the second-largest German creditor to the Greek government. But behind the reassuring name -- "Wertmanagement" can be translated as "value management" -- is the bad bank for Hypo Real Estate, which had to be nationalized during the financial crisis. Similarly, the bad bank for Düsseldorf-based regional bank WestLB -- which bears the not overly trust-inspiring name "Erste Abwicklungsanstalt" ("primary liquidation establishment") -- also holds roughly €1.4 billion in Greek sovereign bonds.

With a 50-percent haircut, the two bad banks would lose around €4.4 billion in total. Taxpayers would end up indirectly footing the bill.

The rest of Germany's regional banks, which are known as Landesbanken and are predominantly owned by individual federal states and savings banks, collectively have about €2.5 billion in outstanding loans to the Greek government. But none of the institutions, however, would be left seriously in trouble by a drastic haircut -- they have sufficient capital at their disposal.

Of mild comfort is the fact that the state would probably not have to come to the rescue of any private institutions. Commerzbank, Deutsche Bank and the DZ Bank, which acts as the central bank for Germany's roughly 1,200 partly state-owned co-operative banks, are (once again) in a position to be able to cope with possible shortfalls by themselves.

This is aided by the fact that the write-offs at places like Deutsche Bank might be smaller than the amount involved (€1.6 billion) would suggest. Sources close to Germany's largest bank have indicated that the bulk of the Greek securities have already been accordingly revalued. Even if worst comes to worst, any additional reduction in value would tend to be limited.

The situation would also be manageable for German insurance companies. A year ago, the industry assumed that up to 1 percent of all its investments were in Greek government securities. But since then, the figure is estimated to have fallen well below 0.5 percent, which corresponds to a maximum value of €6 billion.

A debt restructuring of 50 percent would therefore see write-offs of at most €3 billion. In view of insurance companies' total investments of €1.2 trillion, it is probable that no single company would find itself in serious trouble -- and almost no individual customer would feel the consequences in their life or pension insurance policies.

Fund investors also have little to fear. With the four largest providers, which manage more than two-thirds of the money, the risks are minimal to non-existent:

•DWS invested less than 1 percent of its assets in Greece. The value of most of this has already been adjusted.
•Deka only has one fund which still holds Greek government securities. Even in this product, they do not play any significant role.
•At Union Investment, the share of total assets held in the form of Greek government bonds is very low, at below 0.15 percent.
•Of the big four, Allianz Global Investors took the most thorough approach to dealing with the issue. Today, the asset-management firm no longer holds even a single cent in Greek debt.

A drastic restructuring of Greek debt would therefore lead neither to a collapse of private banks nor to the implosion of the insurance sector in Germany, and would scarcely affect the fund investors.

Risk to Taxpayers

But the situation looks different for the German government and the federal states. At the very least, the large exposure of KfW and the bad banks of Hypo Real Estate and WestLB could end up being expensive. Taxpayers might need to step in, as might the savings banks that are owned by municipalities.

In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.

So nothing to worry about, then? Not quite, even if a debt haircut for Greece would appear to be manageable for Germany. The greatest dangers of such a course of action lurk elsewhere. The Greek banking system would probably break down, while the country would find itself unable to borrow on the financial markets for a long time.

And a partial Greek default could also result in an aggravation of the euro crisis for a different reason. If Ireland and Portugal were to be infected by the debt restructuring virus, the situation would quickly spin out of control. In that event, private banks, insurance companies and investors in Germany would definitely feel the consequences.

[Zoupa]

Why is there Zanza and Zanza2?

I'm scared. 

[The Brain]

Yeah what happened to Zanza3?

[Martinus]

I am also not sure if state-owned banks have to fulfill the Basel III criteria.

They are supposed to I think b/c the Landesbanken were squealing about new capital requirements.

I'd prefer they applied Basil II criteria: have all Bulgars' hands chopped off.

[Admiral Yi]

We are talking apples and oranges.  The apples are the problem that zanza posted about - in a currency union, by definition the value of the currency will not adjust to reflect merely local conditions, which means (like the old fashioned gold standard) that the only adjustment mechanism for a chronic current account deficit is deflation.  If that occurs in the context of high levels of private or public debt, the consequence can be a Fisherian debt deflation spiral.  In a fully integrated national economy, that response is tempered by fiscal transfers, internal migration, centralized bank rescue and support schemes, and possibly central guarantees of state or regional level debt.

A Fisherian deflationary spiral only can happen if the debt being liquidated is large enough to affect the real money supply.  I don't think that's true for an economy the size of Greece's compared to the euro.

[Zanza]

Why is there Zanza and Zanza2?

I'm scared. 

When Languish came back online after the crash, I couldn't send myself a new password. Now I could and figured I could go back to Zanza.

[Zanza]

Did the integrationists really expect the whole Europe to develop common governance?  I know it's not 1913 anymore, but it still seems like they're quite a ways off from having the conditions for that.  It also doesn't help that the only candidate for a common language, which a unified entity needs, belong to a country that definitely doesn't want to be integrated.

English is already the de facto common language. However, that's "International" English, not British English. It has a much reduced vocabulary, doesn't use idioms and other subtle ways to express something. I remember reading how British diplomats faced problems in Brussels because everybody was quite comfortably speaking English, yet they somehow felt left out because they spoke a language that wasn't as readily understood. So Britain being eurosceptic really doesn't matter language-wise.

[alfred russel]

Very interesting.

[Agelastus]

And very accurate.

[grumbler]

Very interesting.

I almost agree.

[Neil]

Very interesting.

I almost agree.

[jimmy olsen]

Very interesting.

I almost agree.

Nice 

[The Minsky Moment]

Fisherian deflationary spiral only can happen if the debt being liquidated is large enough to affect the real money supply.  I don't think that's true for an economy the size of Greece's compared to the euro.

It can happen to Greece.