How UK banks could pay for Greek crisis

 

The Greek crisis has been dubbed the eurozone's 'Lehman moment' and fears are growing that the single currency will not survive the upheaval. City Focus by Simon Duke.

Supporters of the Greek Communist party (KKE) take part in a rally against austerity measures at Omonoia square in Athens June 16, 2011.

Protest: Athens has been rocked by a wave of popular rebellions

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With Europe stumbling from one Greek fudge to another, the day of reckoning for the region's banks moves ever closer into view.

Regardless of the shape of the new rescue package for Athens, it is now abundantly clear that lenders across the eurozone will have to shoulder some of the cost of shoring up crisis-torn Greece.

Sooner or later, the banks that made careless loans to Athens are facing a new round of fresh losses.

And it will be either investors or taxpayers across the region who'll be asked to fill the chasm.

Because, no matter how hard eurozone political leaders and the International Monetary Fund strive, the new bailout for Athens is likely to be a debt default in all but name.

Sooner or later banks will have no choice but to writedown their vast holdings of Greek debt.

It is little surprise, then, that this impending crisis has been dubbed the 'Lehman moment' for the eurozone and its banking system.

On the surface these apocalyptic predictions may appear far-fetched. After all, the 2008 collapse of the Wall Street giant triggered a colossal $2 trillion in losses across the global financial system.

While not on that scale, the sums at stake in the broader eurozone debt crisis are certainly big enough to induce a fresh wave of panic across financial markets.

French and German banks are the most exposed to Greece, with £40bn and £25bn respectively tied up in the country, according to the latest figures from the Bank of International Settlements.

But where Greece leads, bailed Ireland and Portugal will surely follow. Both of these bailed-out nations are splintering under the weight of their debt mountains - and few economists believe either will be able to repay their creditors in full.

Under that nightmare scenario, it would be British banks left nursing fresh wounds. UK lenders have an eye-watering £120bn in exposure to stricken Ireland, with bailed-out Lloyds and Royal Bank of Scotland saddled with the biggest loan books.

For months European leaders have been bickering over the terms of a new rescue deal for Greece.

 
Read more: Markets hit by fears of Greek 'Lehman moment'
 

Faced with a population weary of bailing out its profligate partners, Germany has been pushing for the holders of Greek debt to accept some losses on their bonds.

The European Central Bank, backed by France, has staunchly resisted, fearing that burden sharing would inflict huge damage on the region's banking system.

All the while, its cost of borrowing has soared and confidence has drained away to such an extent that Greece now has the lowest credit rating of any country in the world.

But the moment of truth is fast approaching. Greece is due to receive £10bn from last year's last year's joint EU/IMF bailout at the end of this month.

But unless its shaky government can enact a fresh package of austerity measures the money won't be released, and Greece will simply run out of cash by the middle of next month.

With no money to pay the interest on its loans, Athens would plunge into default. To avert this catastrophe, the EU's economic commissioner Oli Rehn has chosen to apply yet another sticking plaster.

Yesterday Rehn trumpeted a compromise deal whereby the IMF would disburse the much-needed money - but only if Greek prime minister George Papandreou can get a new budget through parliament.

This is a big 'if'. Athens has this week been rocked by a wave of popular rebellions, with the aptly named 'Indignant Citizens' at the heart of the protests.

Rebellion has torn apart the ruling socialist party, and Papandreou now wants to stitch together a government of national unity to usher Greece back from the brink.

He has put himself up for a vote of confidence on Sunday. But even if he manages to quell the restive parliament, the omens look extremely bleak for Papandreou and his beleaguered nation.

Between 2012 and 2014, Greece has to repay £72bn to international investors. With no prospect of raising money from the money markets, it will be left utterly dependent on the good grace of its EU partners.

With Germany and France deeply divided on how to deal with the debt laden periphery, it seems that the EU will at some point tire of kicking this particular can down the road.

Jonathan Loynes at Capital Economics said: 'While an additional bail-out package may stave off near-term disaster, a major debt restructuring now seems inevitable.' Would the single currency, let alone its beleaguered banks, survive such a seismic upheaval?

Exposure of European and US banks graphic