Does a Greece Default Matter? The View from Bank Debt
April 22, 2015
EU banks most exposed to a Greek default are showing some spread widening, but nothing special.I think that the driver is that ECB-QE dampens volatility—which is the same thing as saying that investors are complacent on the issue.These banks will underperform given a default.
Non-EU banks of comparable size show more meaningful widening on 5Y CDS spreads (less complacency). However, the spread levels are still below their EU brethren, indicating they are less exposure.These names will widen further on a default but will outperform EU banks.
Japan credit is completely disconnected from concerns about Greece—even for financial names that have European exposure.Given that a default will result in bank write-offs that definitely have some contagion impact, there is no sign of it.A Greek default will widen spreads, but the in terms of level these names will outperform European bank debt.
Absent from analysis is US bank debt. That is for a separate post.
My Uncle Larry was completely allergic to any rumor of apocalypse. I suppose he had seen so much bizarro crap that he had no tolerance for emotive reactions to news and events. He relied on markets and what they said. He knew they never lie (so pay attention to how they price risk), but he also knew they could be pretty stupid at times (the price can be wrong). This balance served him well. One of his favorite quotes was:
“If markets are always right, then why trade them at all?”
He taught this fearful dork- yours truly- a practical lesson on the matter. In the depths of the 2009 market crunch he bought a Toyota minivan on a “5 years no interest” deal. The same day he put the money in a 5Y CD maturing the day before he had to pay any interest. He pocketed the 3%-ish interest income and retired the debt by merely paying back the principal. Zero risk. You may recall that you needed some serious guts in January 2009 what with all the screams of apocalypse going on.
This is what the markets reflect when it comes to a Greek default. If there was a sector that would suffer from a Greek default it would be banks, especially European banks. If there is a cash instrument with real information about European bank fundamentals, it is their debt. To balance liquidity with information content, then go to CDS. All data presented is 5Y maturities, with spread trend over the past 12 months. Presented with little commentary…
Selected EU Banks with Reported High Exposure to Greek Debt
BNP-Paribas, Société Générale, and Deutsche Bank show some widening, but nothing special. Verdict: It looks like “Greece fears front and center of the past 30 days or so implies a 5-10 bps move in 5Y CDS spreads. Note that spreads are not touching 52 week highs, though BNP is closer than his brethren.
Non-EU Europe contagion concerns. UBS and HSBC show 5Y spreads blowing out above 52 week highs. Verdict: Some non-EU contagion showing here, but spreads are still tight to all EU banks shown. The spread shows not much of concern, but the move to 52 week highs shows the power of ECB-QE to make things easier on their comparable EU heavyweights.
One thing is for certain. Japan couldn’t care less. Like, at all. Something of a minor puzzle is that even Nomura—which runs a sizable business in European debt is not showing concern at this point. Verdict: some complacency in Japan credit with exposure to Europe, but in all Greece is a complete non-issue here. Japan's biggest bank sure doesn't likea honey-badger.