How to Prepare for a Greek Defaulthttp://www.fool.com/investing/international/2011/06/17/how-to-prepare-for-a-greek-default.aspx Amanda B. Kish, CFA
June 17, 2011
Times have been tough lately for a lot of folks: Rep. Anthony Weiner, Vancouver Canucks fans, and investors with exposure to Greek debt obligations. As Greece teeters on the brink of insolvency, markets around the world are becoming increasingly jittery. Investors are rightfully fearful of a potential Greek default that could touch off a domino effect, taking down much of Europe's financial system and forcing billions of dollars of losses on banks, shareholders, and taxpayers.
A day of reckoning
Earlier in the week, Standard & Poor's cut its credit rating on Greece's sovereign debt from B to CCC, the world's lowest, and noted that the risk of a debt restructuring is "increasingly likely." Greek government bonds have lost roughly 19% so far this year, while Portuguese debt instruments have fallen about 17%, according to Bloomberg. More financially stable eurozone nations like France and Germany have a vested interest in ensuring that Greece doesn't default, but at some point that may become a near eventuality.
Banking on losses
According to SEC filings, the firm with the largest direct exposure to Greece is Bank of America (NYSE: BAC ) , with about $447 million. And although Citigroup (NYSE: C ) and JPMorgan Chase (NYSE: JPM ) probably have some exposure, they weren't required to provide an exact amount on their filings, which means they probably have a small amount as a percentage of assets.
A Greek default might not rock our financial system, but it probably would drag down stock prices in the financial sector at least somewhat, so investors might want to tread lightly here.
Likewise, European banks are also potentially on the line for several billions of dollars in Greek debt exposure. French banks currently have nearly $57 billion in exposure to Greece, while German banks clock in with $34 billion in exposure. In fact, Moody's recently warned that it may downgrade the three largest listed French banks, BNP Paribas, Societe Generale, and Credit Agricole, because of their substantial exposure to Greek debt. Stock investors should carefully review how much exposure they have to European banks like these that are likely to be affected by a Greek default or restructuring.
A ticking time bomb