We are confronting a crisis, all right, but it is not a Greek crisis, unless uncertainty as to the date of that country's de facto default counts as a crisis, The Wall Street Journal Agenda blog reported in a commentary.
If the insolvency of that tiny country were the world's only problem, it would be stretching the word "crisis" to apply it to the travails and insolvency of that tiny country.
What we have come to call the Greek crisis is, first, an international banking crisis. Like Lehman Brothers, Greece is definitely not too big to fail. It is too interconnected to fail, too interconnected to the international banking system, too interconnected to the political ambitions of those who have spent decades replacing the system of nation states with a united Europe.
Start with Greek banks, which hold €70 billion ($99.3 billion) of their government's sovereign debt. The Economist estimates that if Greek banks were required to recognize the fact that markets are valuing Greek government debt at about half the value assigned to this paper on their books, shareholders would be wiped out and the banks would have to scramble to raise substantial new capital. Depositors would scramble to get their money out, and the European Central Bank would have to torture its rules to find a way to continue accepting Greek bank IOUs in return for the cash needed to maintain the liquidity of the Greek banking system.
Other financial institutions would also find life more difficult. Many of Germany's under-capitalized banks would be hard hit if they were forced to recognize that their books are in good part works of fiction, with IOUs of Greece and its banks and businesses recorded at values that have no relation to their true worth.
German banks are not alone in their predicament: The rating agencies are already expressing concern about the exposure of three French banks and some 29 Italian banks, and the governor of the Bank of England has called the problems of overly indebted euro-zone countries the "most serious and immediate risk" to the U.K. financial sector. Read more. (Subscription required.)
Location