Greece’s troubles are getting worse, as S&P downgraded their rating to junk. Given that I’ve previously looked at the impact of Greece’s troubles on markets, I thought I would update some of the charts to see if the relationships still hold.
At the epicenter of the crisis, the Greek stock exchange has been massively hit by Greek troubles. The National Bank of Greece, now the second largest component of the index (Having fallen behind the Coca Cola Hellenic Bottling Company), has fallen almost 45% year to date. There are many reasons for investors in Greek banks to be worried. First, these banks tend to hold a lot of Greek debt, which has been rapidly falling in value. Greek bonds with a duration of 10 years have seen their face value fall over 20% in the past two months alone. Second, the tail risk of Greece leaving the Euro is becoming less tail and more real. If Greece leaves the Euro, there will almost certainly be bank runs on Greek banks as depositors try to prevent their accounts from being devalued. Finally, even if crisis is averted it will be due to the imposition of extreme austerity measures by the Greek government. Cuts in spending and tax hikes will depress the economy and hurt the earnings of all Greek companies, including financial institutions.
Greek CDS & Athens Stock Exchange
The relationship between the S&P 500 vs. Eurostoxx in dollars seems to be holding up quite well. The euro has also been taking quite a hit.
Greek CDS & SPX/Eurostoxx (USD) & USD/EUR
When looking into which sectors should be most effected, banks seem like the obvious choice. European banks should be hit harder than US banks for a few reasons. [Edit: The most obvious reason European banks hold more Greek debt than US banks is that banks can repo the bonds of European Sovereigns with the ECB.] Due to home bias, European banks have larger investments in Greek bonds than US Banks. Home bias doesn’t quite explain their larger holdings; they also have a search for yield mentality. This search for yield is part of why European banks were buying subprime bonds from Goldman Sachs (Although IKB was also betting on the housing market going up in 2007), and this is why they currently hold a lot of Greek debt. According to BIS estimates provided by the Economist, the non-Greek euro area Banks own approximately 58% of the total outstanding Greek debt held by foreigners while US banks only own 5.3%. Since these banks are still recovering from the last financial crisis, the impact of a Greek credit event could be devastating.
S&P 500/Eurostoxx (USD), US Banks/Euro Banks (USD) and USD/EUR