Like a middle-life rock star on a stadia comeback tour, the notion that Greece might exit the eurozone is not going to lie down and die. For the moment, it’s strutting about playing air guitar ahead of the latest restructuring negotiations.
So, why should everyone (and banks in particular) be fearful of a Greek exit from the eurozone? What should you say in the event that you’re asked this in your investment banking interview? The tables below, from UBS and Bernstein Research, provide some quick and simple answers.
1. Greek banks are still very reliant upon the ECB for their funding
Greek banks need the European Central Bank (ECB) to buy their debt. As the chart below (from UBS) shows, their reliance on ECB funding is less than it was, but still far from negligible. In December 2014, for example, the ECB bought €56bn of Greek debt, up from €45bn in November.
Greek banks can also borrow through the European Liquidity Assistance Programme (ELA). In theory, they could continue doing this even if Greek exits the euro. However, UBS points out that the ELA needs to be approved by the ECB, so it can’t be taken for granted.
Conclusion: If Greece exits the euro, Greek banks will default upon their debt repayments.
2. The Greek government has a huge heap of debt to refinance this year
It’s not just Greek banks that need to refinance their debt, the Greek government needs to too. UBS estimates that the Greek state needs to finance around €17bn of debt in 2015. It predicts that the problems will hit in July and August when it has to around €7bn debt bought by the ECB under the now defunct Securities Markets Programme needs to be repaid. Without a new European/IMF deal, UBS says Greece is unlikely to be able to raise this money from the markets.
Conclusion: There is a risk that the Greek government will default on its debt.
3. British banks are fairly exposed to the Greek state, to Greek banks, to Greek companies and to Greek individuals
If the Greek government or Greek banks default on their debt, the banks that lent money to them will be hurt.
As the chart below, from Bernstein Research, shows HSBC has by far the largest exposure to Greek debt of any UK bank. Moreover, HSBC is very exposed to the Greek ‘sovereign’ (government). If Greece doesn’t repay its debts, HSBC risks losing up to $7.3bn, or 4.5% of its net tangible assets. However, Bernstein points out that things may not be as bad as they look – the most recently available figures for HSBC are currently from 2013, and the bank has probably cut its Greek exposure in the past year.
Conclusion: If Greek entities are unable to repay their debts, HSBC’s share price will almost certainly fall.
4. European banks are fairly exposed to Greek banks, companies and individuals. This applies to French banks, especially
French banks also stand to lose a lot of money if Greece can’t repay its debts. Bernstein points out that Credit Agricole in particular (ACA in the charts below) has huge exposure to the Greek market. In 2013, 12.6% of Credit Agricole’s net asset value was tied up in Greece (all of it owed by the Greek private sector). By comparison, just 3.2% if BNP Paribas’ net assets were exposed to Greece and just 0.8% of SocGen’s (GLE’s) were.
Conclusion: Credit Agricole could be in trouble if Greek banks, companies and individual default on their debt.
5. Following a Greek exit, banking stocks would probably fall
If Greece exits the Eurozone, UBS strategists predict that investors will panic and put their money into ‘defensive’ and ‘low risk’ stocks. As shown by the chart below, these include food, pharmaceuticals and general retail. By comparison, banking stocks are considered high risk and would almost certainly suffer.
Conclusion: Banking stocks could plummet if Greek exits the eurozone and defaults on its debt. This would clearly also be bad news for bankers whose bonuses are paid in bank stock.
6. But the UK and Swiss stock markets overall will be affected less than others
Finally, while bank stocks might fall if Greece leaves the eurozone, UBS’s analysts suggest that the UK stock market as a whole could benefit (comparatively).
This is because the UK and Switzerland are seen as ‘safe havens’ for money when there are wobbles in the eurozone. Germany is a comparative safe haven too. By comparison, the stock markets of Spain. Ireland, Portugal and Italy are all more correlated with events in Greece and will suffer more acutely.
Conclusion: UK banks have most to fear from a Grexit. UK plc will still suffer, but less so.