In the discussions on the Greek debt crisis, I believe a point that is often overlooked is the interdependence of the various eurozone economies with each other.
According to a diagram published recently by the New York Times, banks and governments in the weaker economies – Greece, Portugal, Spain, Italy and Ireland, have lent in excess of US$360 billion to each other. Therefore, a default by Greece would have an immediate impact on each of the other four weaker economies.
Stronger eurozone economies such as Germany and France have even larger exposures.
France is owed almost US$1 trillion by these five countries, US$75bn by Greece, US$511bn by Italy, US$45bn by Portugal, US$220bn by Spain and US$60bn by Ireland. It is interesting to note that France’s exposure to Italy represents a staggering 20% of French GDP!
Germany’s exposure is slightly less at US$704bn; it has US$45bn on Greece, US$190bn on Italy, US$47bn on Portugal, US$238bn on Spain and US$184bn on Ireland.
Most of these commitments have been made by banks located in the eurozone. An incentive was the zero capital requirements due on exposures to sovereign credits under Basel 1 and Basel 2. Another was the fact that these investments were denominated in Euro, a clear advantage to banks from the eurozone who did not have to hedge their investments back into their home currencies.
This last point may explain why UK banks have much smaller exposures. The UK is owed only US$414bn from weaker economies in the eurozone, most of which is with Ireland (US$188bn).
UK banks should therefore have relatively more lending capacity available for companies wanting to expand in the UK. Another consequence is that the European Central Bank will be unable to raise interest rates without making matters worse and the Euro will continue to depreciate against all major currencies.