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Greece Fallout: Italy and Spain Have Funded a Massive Backdoor Bailout of French Banks

by Benn Steil and Dinah Walker
July 2, 2015

Greece France Spain and Italy

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In March 2010, two months before the announcement of the first Greek bailout, European banks had €134 billion worth of claims on Greece.  French banks, as shown in the right-hand figure above, had by far the largest exposure: €52 billion – this was 1.6 times that of Germany, eleven times that of Italy, and sixty-two times that of Spain.

The €110 billion of loans provided to Greece by the IMF and Eurozone in May 2010 enabled Greece to avoid default on its obligations to these banks.  In the absence of such loans, France would have been forced into a massive bailout of its banking system.  Instead, French banks were able virtually to eliminate their exposure to Greece by selling bonds, allowing bonds to mature, and taking partial write-offs in 2012.  The bailout effectively mutualized much of their exposure within the Eurozone.

The impact of this backdoor bailout of French banks is being felt now, with Greece on the precipice of an historic default.  Whereas in March 2010 about 40% of total European lending to Greece was via French banks, today only 0.6% is.  Governments have filled the breach, but not in proportion to their banks’ exposure in 2010.  Rather, it is in proportion to their paid-up capital at the ECB – which in France’s case is only 20%.

In consequence, France has actually managed to reduce its total Greek exposure – sovereign and bank – by €8 billion, as seen in the main figure above.  In contrast, Italy, which had virtually no exposure to Greece in 2010 now has a massive one: €39 billion.  Total German exposure is up by a similar amount – €35 billion.  Spain has also seen its exposure rocket from nearly nothing in 2009 to €25 billion today.

In short, France has managed to use the Greek bailout to offload €8 billion in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010.  The upshot is that Italy and Spain are much closer to financial crisis today than they should be.

 

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Post a Comment 10 Comments

  • Posted by Luigi

    Good. Some people understood this since more than one year. But mainstream media tell only lies about euro and EU. Thanks anyway.

  • Posted by Brigitte Granville

    Indeed, excellent article!

  • Posted by MC

    oh about the french banks hmm sorry but the French banks were more involved in private sector, and got their burdain of the 2012 haircut

    from BIS quarterly review April 2011

    “According to the new figures, a preliminary release of which went out in April, French banks have $56.7bn of lending exposure to Greece while German banks have about $40bn. But look closer, because the BIS figures have something new — a breakdown of credit exposure by type. On that basis, German banks are the most exposed to Greek government debt with $22.7bn held. French banks have $15bn.”

    http://ftalphaville.ft.com//2011/06/06/585381/bis-the-burdensharing-new-greek-exposure-numbers/

  • Posted by MC

    Interestingly, US and UK banks have been increasing their Greek exposure again, since March 2013, reaching back to levels not very far from those of end 2009 /early 2010. US banks’ exposure to Greece as of September 2014 was in fact 8 billion (down from 13 billion in June) and UK banks’ exposure was 10 billion. Euro area banks have behaved very differently and total exposure to Greece has in fact continued to decline in almost all countries. Even more interestingly, the only country where banks have been continuously increasing their exposure to Greece since 2013 is Germany. German banks’ foreign claims on Greece in fact reached 32 billion in March 2010, dropped to as low as 3.9 billion at the end of 2012 and went back to around 10 billion in June 2014. Therefore the recent increase is small compared to the historical level, but it has been continuous (at least until September 2014).

    http://www.bruegel.org/nc/blog/detail/article/1557-whos-still-exposed-to-greece/

  • Posted by AgentG

    “The upshot is that Italy and Spain are much closer to financial crisis today than they should be.”

    This last sentence does not make sense. Why is this an upshot? Aren’t Spain and Italy much better off today? Something is not right with the formulation.

  • Posted by Benn Steil and Dinah Walker

    The post is about exposure to Greece. For Italy and Spain it was near-zero in 2010; now it is €39bn and €25bn respectively.

  • Posted by moses

    Funny-not seeing any mention of US taxpayers directly bailing out BNP Paribas to the tune of $41billion???????

    UBS, Switzerland’s largest bank, was the biggest borrower from the Commercial Paper Funding Facility, tapping the program 11 times for $74.5 billion.

    Six European banks were among the top 11 companies that saccumulated the most debt overall — a combined $274.1 billion .

    Dexia tapped the US government for $53.5 billion. Other European users included Barclays Plc in London at $38.8 billion; Royal Bank of Scotland Group Plc at $38.5 billion; and Paris-based Natixis at $27 billion.

    The Fed listed borrowing for Paris-based BNP Paribas at $41.8 billion.

    Commerzbank of Germany borrowed $350 million at the Fed’s discount window.

  • Posted by Peter

    Can someone please explain the precise mechanism used as outlined in the following sentence “Instead, French banks were able virtually to eliminate their exposure to Greece by selling bonds, allowing bonds to mature, and taking partial write-offs in 2012. ” Fore example, does it mean that the French banks sold bonds (backed by/securitised on their loans to Greece) to amongst others, Italian and Spanish banks/financial institutions? Thanks for helping.

  • Posted by Benn Steil and Dinah Walker

    We have no way of knowing to whom French banks sold their Greek assets.

  • Posted by google

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    And i am satisfied studying your article. However want to observation on some common things, The site style is perfect, the
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