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Why You Should Care About the Greek Crisis
The Greek crisis is spreading through Europe. Is the U.S. economy next?
Greek default fears are starting to infect Germany and its banks, which have significant holdings of Greek sovereign debt. And the infection is spreading to the U.S. because of close connections between U.S. and German banks.
International loans to Greece are in jeopardy because the aid is conditioned on deficit reduction and other fiscal reforms. The Greek government is not moving quickly enough for its foreign benefactors, but even those thin budget cuts threaten the country’s stability. Greek workers on the government payroll, including garbage collectors and doctors, are striking in protest of austerity measures that are hitting their paychecks. Homeowners face record high property taxes and restaurant goers face a new sales tax on their meals.
The measures are intended to smooth the release of an 8 billion euro piece of the 110 billion euro bailout loan package that was promised last year—but which is contingent on Greece getting its financial house in order.
German bank stocks took a dive last week, bringing Wall Street along for the ride, because of exposure to Greek debt at European and American banks. The slide started after Bloomberg reported that the German government had a plan B to rescue its banks in the likely event of a Greek default. Banks could face losses of up to 50 percent on their holdings of Greek debt if the latest loan component is withheld.
The terms of the bank rescue plan were not released, but talk about forced recapitalization has been growing in recent weeks. In a recapitalization, an insurance fund—which could be funded by government or private investors—guarantees bank deposits by covering the difference between the book and market value of the bank’s assets. The insurance fund could take an equity position in the bank in exchange for the assistance.
Earlier this month, International Monetary Fund Managing Director Christine Lagarde called for “mandatory substantial recapitalization—seeking private resources first, but using public funds if necessary.”
As reported by AdvisorOne's Gil Weinreich, German banks are exposed to about $40 billion in Greek sovereign debt. But they hold almost $700 billion in PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt. Greek
default likely would jeopardize access of the other PIIGS countries to the capital markets, bringing the sovereign debt of the other PIIGS along for the ride.
U.S. markets, led by domestic banks, have about $600 billion in exposure to Germany, largely through swap contracts with German banks.
Despite being only the 32nd ranked country in terms of GDP, a Greek default would ripple across the world economy and could spark a new financial crisis. And there’s no sign that Greece is willing, or able, to take the kind of action necessary to shore up its economy long-term.
For additional coverage of this issue and similar ones, we invite you to sign up with AdvisorOne’s partner, AdvisorFX, for a free trial.
See also The Law Professor's blog at AdvisorFYI.
About the Author
Robert Bloink, Esq., LL.M.
Robert Bloink is a professor of tax for the Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law.
Previously, he served as Senior Attorney in the IRS Office of Chief Counsel, Large and Mid-Sized Business Division, where he litigated many cases in the U.S. Tax Court, served as Liaison Counsel for the Offshore Compliance Technical Assistance Program, coordinated examination programs audit teams on the development of issues for large corporate taxpayers, and taught continuing education seminars to Senior Revenue Agents involved in Large Case Exams. In his governmental capacity, Mr. Bloink became recognized as an expert in the taxation of financial structured products and was responsible for the IRS’ first FSA addressing variable forward contracts. Mr. Bloink’s core competencies led to his involvement in prosecuting some of the biggest corporate tax shelters in the history or our country.
Mr. Bloink's insurance practice incorporates sophisticated wealth transfer techniques, as well as counseling institutions in the context of their insurance portfolios and other mortality based exposures.
About the Author
William H. Byrnes, Esq.
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow
Prof. William H. Byrnes, Esq., LL.M., CWM, Fellow, is the leader of Summit Business Media's Financial Advisory Publications, having been appointed July 1, 2010. He has been an author and editor of 10 books and treatises and 17 chapters for Lexis-Nexis, Wolters Kluwer, Thomson-Reuters, Oxford University Press, Edward Elgar, and Wilmington, as well as numerous commissioned, peer-reviewed, and law review articles. He was a Senior Manager, then Associate Director of international tax for Coopers and Lybrand, which subsequently amalgamated into PricewaterhouseCoopers, practicing in Africa, Europe, Asia, and the Caribbean.
He has been commissioned and consulted by a number of governments on their tax and fiscal policy from policy formation to regime impact. He has served as an operational board member for companies in several industries including fashion, durable medical equipment, office furniture, and technology. Since 1994, he has been a professional trainer for professional association conferences, government workshops, and financial service institutions in-house meetings.
Before Associate Dean Byrnes joined the administration of Thomas Jefferson School of Law, he was a tenured law faculty member at St. Thomas School of Law. He serves on the Academic Committee of the American Academy of Financial Management. He created the first online graduate program offered to wealth managers and life insurance producers without any legal background—see http://llmprogram.tjsl.edu (Graduate Program of International Tax and Financial Services, Thomas Jefferson School of Law).
Email: wbyrnes@nationalunderwriteradvancedmarkets.com
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