Greece debt could trigger a new global financial crisis
The country is now on the verge of default. Greece needs an infusion of $ 85 billion by mid-July to avoid default. And most economists believe that Greece can never cope with the situation since it is incapable of repaying its debts.
But the real issue is not merely confined to Greece. There is a hidden link between the Greek debt situation and the US banking system. It is that link, which could ignite the next global credit crisis.
The odds of the next global credit crisis are increasing with each day, and with each new revelation. The escalating fears are hitting worldwide stock markets hard. Only on June 16, the Greece leaders revealed that the country’s socialist government was on the brink of collapse. The austerity measures and the country’s record 16.2 percent unemployment rate are destabilizing the nation. Now rioting is a common scene in the streets of Athens.
Moody’s Investors Service warned France’s three largest banks that their exposure to Greek debt could lead to credit- rating downgrades. European Central Bank( ECB) may be technically insolvent- meaning it wouldn’t survive a global financial meltdown.
The ECB has $ 116 billion of equity capital against a balance sheet of $ 2.84 trillion of assets consisting of bonds, loans and credits. Of that amount $ 637 billion of debt paper from Portugal, Ireland, Italy, Greece and Spain. Of that total $ 270 billion are Greece’s crumbled paper. Thus 40 to 50 percent cut on Greek debt would come close to wiping out the ECB’s capital base. This would sink the central bank almost overnight.
The crisis has assumed a new dimension when the investors discovered that it’s actually the US financial system that may end up as the real weak link in the event of Greek debt default. Big US banks have been lending generously to banks across Europe. While these banks have pulled back considerably as a result of recent turmoil, US banks are widely believed to have $41 billion of direct exposure to Greece. The US financial system link doesn’t end there. US money-market funds have a hefty European exposure, too.
Three large banks Moody is threatening to downgrade include BNP Paribas, Credit Agricole SA, and Sociiete Generale SA that get a significant amount of their short-term funding from America’s money markets.
Thus the financial crisis in Greece is radiating to European Union and US and ultimately to all countries having financial links with them. It is the inevitable outcome of the globalizing.