BAD NEIGHBOR

Backdoor bailouts saved French banks from sinking with Greece

In March 2010, two months before the announcement of the first Greek bailout, European banks had €134 billion worth of claims on Greece. French banks had by far the largest exposure: €52 billion—this was 1.6 times that of Germany, 11 times that of Italy, and 62 times that of Spain.

The €110 billion of loans provided to Greece by the IMF and Eurozone in May 2010 enabled Greece to avoid default on its obligations to these banks. In the absence of such loans, France would have been forced into a massive bailout of its banking system. Instead, French banks were able virtually to eliminate their exposure to Greece by selling bonds, allowing bonds to mature, and taking partial write-offs in 2012. The bailout effectively mutualized much of their exposure within the Eurozone.

The impact of this backdoor bailout of French banks is being felt now, with Greece on the precipice of an historic default. Whereas in March 2010 about 40% of total European lending to Greece was via French banks, today only 0.6% is. Governments have filled the breach, but not in proportion to their banks’ exposure in 2010. Rather, it is in proportion to their paid-up capital at the ECB—which in France’s case is only 20%.

In consequence, France has actually managed to reduce its total Greek exposure—sovereign and bank—by €8 billion. In contrast, Italy, which had virtually no exposure to Greece in 2010, now has a massive one: €39 billion. Total German exposure is up by a similar amount: €35 billion. Spain has also seen its exposure rocket from nearly nothing in 2009 to €25 billion today.

In short, France has managed to use the Greek bailout to offload €8 billion in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010. The upshot is that Italy and Spain are much closer to financial crisis today than they should be.

This post originally appeared at Geo-Graphics, a Council on Foreign Relations blog. We welcome your comments at ideas@qz.com.

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