BIS Report Shows High US Exposure To European Defaults

Many people in Germany, France, Britain and the United States believe that European countries like Greece, Ireland and Portugal should simply be allowed to default, so that we can all get on with our lives.

Bank of International Settlements, Basel, SwitzerlandBank of International Settlements, Basel, Switzerland

However, the new Bank of International Settlements Quarterly Review for June 2011, released on Monday, shows that default would not be such a simple matter.

The new BIS report contains new data on cross-border bank exposure that wasn’t in previous reports. That is, it answers this question: If one country defaults on its debt, how much money will the banks of other countries lose?

In the following table, I’ve extracted the exposures of France, Germany, Britain and the U.S. to defaults in Greece, Ireland and Portugal.


country France Germany UK US
----------- -------- -------- -------- --------
Greece $ 65.047 $ 39.923 $ 19.018 $ 41.451
Ireland 45.030 158.548 194.483 105.955
Portugal 31.759 50.183 29.063 46.500
----------- -------- -------- -------- --------
TOTAL $141.836 $227.534 $242.564 $193.906

All amounts are in billions of dollars

(If you want to examine these figures for yourself, look at Table 9E in the “Detailed Tables” portion of the report.)

The above totals are enormous. In the scenario where all three countries defaulted, and investors were forced to take a 50% “haircut,” the U.S. would lose $97 billion (half of $194 billion). This would cause a convulsion that would be worse than the Lehman Brothers bankruptcy, especially since the three European countries shown (France, Germany, UK) would lose $306 billion — and that doesn’t include the losses from many other countries around the world.

If you’ve never read the article on “The bubble that broke the world,” now would be a good time to do it. This was written in 1932, and tells a great deal about what’s going on today. Note how the collapse of Austria’s Credit-Anstalt bank and Germany’s Danatbank in 1931 brought about massive unemployment, and social tension that gave rise to Communism and Naziism.

U.S. Bank Guarantees to European Banks

If you look at the figures in detail, you make an interesting and intriguing discovery that the exposure of U.S. banks is different in kind from the exposure of the European banks.

The report distinguishes between two kinds of exposures: “Foreign Claims” are direct losses, such as in the value of bond holdings. “Other potential exposures” include “Guarantees Extended,” and a Bank Guarantee is defined online as follows:

“A promise made by a bank to provide payment to another bank or lender on a bond, loan, or other liability in the event of default. Banks often make guarantees on behalf of certain clients to promise payment on loans. Bank guarantees reduce the risk to loans and liabilities and usually improve the credit agency ratings of bonds.”

Now, as it turns out, most of the European banks’ expsoure is in Foreign Claims, while most of the U.S. banks’ exposure is in “Guarantees Extended.” Now isn’t that intriguing?

We know that the Federal Reserve has been helping out European banks for the last three years in all sorts of ways. So a logical guess is that the Federal Reserve has provided over $100 billion in guarantees for these three countries, meaning that the U.S. will have to pay up if these European countries default. That’s a surmise, but it seems to be what the BIS report is saying.

And so, Dear Reader, if you’ve been cheering on defaults by Greece, Ireland and Portugal, then, as my mother used to say, you’re threatening to “cut off your nose to spite your face.” In other words, when these countries default, it will cause a major worldwide banking crisis, throughout Europe, across the United States, and around the world.

But of course, as we’ve been saying for many, many months now, default can’t be avoided. Default is 100% certain. All the Europeans (and the Fed) can do is continue to “kick the can down the road,” by providing more bailouts. In the meantime, more and more debt is being piled on to these countries, so they can make payments on their old debt. Probably the Fed is continuing to provide new Bank Guarantees as well.

What about China? Table 9E doesn’t indicate China’s exposure to these defaulting countries, possibly because China doesn’t want to provide that kind of data. However, I have seen news stories about China investing in Greece and other European countries, so China probably has a large exposure as well.

We’re all in a movie theatre watching an incredibly fascinating disaster movie. But the doors are locked, and we can’t leave the theatre, even when we begin to realize that we’re not just WATCHING the disaster movie — we’re IN the disaster movie, and the disaster movie is happening to us.


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