Should fears of a ‘Grexit’ leave US Investors Worried?

While only months ago it seemed that things had settled in the Eurozone. Fears of a ‘Grexit’ or, Greece abandoning the euro, were beginning to recede. The new Syriza government headed by Alexis Tsipras and his indefatigable Finance Minister, Yanis Varoufakis, are stirring things up again in Europe and the issue is once again brought to the fore. Recently, Greece has warned that the very viability of the EU and the single currency are at stake. As negotiations over Greek policy and the disbursement of funds outstanding from the original $240bn bailout continue into April it is becoming harder and harder for Greece to keep up with its debt repayments.

Greek Debt vs. EU Averages

Greek Debt vs. EU Averages

Clashes over policy are heated and creditors at the EU, ECB, and IMF are refusing to release funds until Greece have issued an acceptable and convincing plan of economic reforms aimed at balancing its economy. As the situation is pushed to the brink “the worst case scenario” – a Greek exit – would undoubtedly cause fallout in the wider Eurozone. Surely as an extension, given the $2,477bn of direct US investment abroad (based on a historical-cost basis at year-end 2012) there is significant exposure in the US.

Recently, however, Standard & Poor’s Ratings Services concluded that a Greek exit from the Eurozone would not have a significant effect on the ratings of banks outside of Greece. There is now limited direct exposure to Greek banks; it is much the same in Greece’s private and public sector. A closer look tells a different story. According to the Bank for International settlements, from a recent high of $138bn in 2011 foreign banks’ direct exposures have fallen rather drastically to a level of just $46bn as of September 2014. The US on its own has the third-largest single exposure at $10.6bn, just behind Germany and the UK at $13.5bn apiece. This however, accounts for just 0.34% of the total banking sector’s foreign exposure in the US, and not much higher in most other countries.

Furthermore, actual exposure is very likely lower than suggested by the BIS. Provisions, collateral and offsetting of derivative positions are not always taken into account by official statistics. Offsetting foreign banks’ exposure to Greek markets has almost certainly hastened since the election of Tsipras and Co.’s hard-left Syriza party and their refusal to accede to previous arrangements regarding the distribution of emergency funds.

Luckily, this means that system-wide levels of exposure remain limited and there is no particular concentration in any one bank. The worst-case scenario of a Greek exit therefore should cause little pain for the economy outside of Greece, with the likelihood of seeing limited damage: even in the most exposed countries of UK and Germany. The main concern is that there is contagion following a Greek exit that causes more substantial economies to collapse. Spain, Italy and Ireland may not be far behind; the domino effect may prove to be much more problematic.

Article by:  Adam Faust, Founder, Deep Blue Financial