Keep Worrying: Greece Looms Large

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Argentina, Russia, and Ecuador have all done it. As fellow Fool John Maxfield writes, sovereign defaults happen all of the time! So why doesn't Greece join in and default already? We shouldn't be too scared if we've lived through previous defaults, right? Wrong. Here's why Greece's default means more than sovereign defaults of the past.

That's a lot of baklava
For one, Greece heavily outweighs previous defaults:

Country

Total Public Debt at Default (millions)

Year

Greece$500,0002012
Argentina$82,0002001
Russia$79,0001998

Source: The New York Times.

Some may point out that Greece's GDP of about $300 billion is dwarfed by the European Union's total GDP of over $16 trillion. Because it represents such a small slice, what would be the big deal if it defaulted and left the EU?

Grecian dominoes
The big deal is that Greece represents the potential future of Italy, Spain, Portugal, and even the entire EU. With Italy's debt-to-GDP already over 100%, Spain's unemployment over 20%,and Portuguese 10-year bonds spiking to over 17% at the end of January, future action may be required to save any country from economic malaise. While Greece represents a small part of the EU's GDP, Italy clocks in at over $2 trillion worth of GDP, Spain claims $1.4 trillion in GDP, and the countries combined add up to over 20% of the EU's GDP.

Whatever actions Greece takes, other countries that are facing mountains of debt will be watching to see the outcome. If Greece is freed from hefty interest payments without much pain, why wouldn't other countries follow its path?

Who might be hurt
As Fool Sean Williams writes, American banks like Bank of America (NYS: BAC) , JPMorgan Chase (NYS: JPM) , Goldman Sachs (NYS: GS) and Citigroup (NYS: C) all seemed to have learned their lesson from America's subprime crisis. Through a mix of credit default swaps and actually avoiding risk, banks have decreased their exposure and potential losses from the crisis. Since 2009, Bank of America reduced exposure to Greece, Italy, Spain, Portugal, and Ireland by 44%, but currently only has 12% of exposure hedged. Citigroup, on the other hand, has 47% of its exposure hedged with credit default swaps. JPMorgan's CEO Jamie Dimon said his company could lose up to $5 billion from the troubled European countries, but this represents less than 5% of bank's 2011 revenue of $110 billion. According to a recent report from Bank of America, Goldman Sachs "feels that it needs to stay pretty close to home, from a risk perspective," because of "the potential for a disorderly Greek default leading to Greece's withdrawal from the Euro."

European banks, on the other hand, have taken bigger hits from Greece itself. The Royal Bank of Scotland (NYS: RBS) lost over $3 billion last quarter, after writing off Greek bonds by over $1.5 billion in 2011. Germany's Commerzbank wrote down Greek-related investments by over $2.5 billion in 2011, but was able to eke out a $850 million profit for the year. Both of these banks face further issues with Commerzbank's exposure to the riskier European countries at over $16 billion and RBS' exposure at $137 billion ($85 billion of

The Foolish takeaway
Greece represents a potential blueprint for troubled EU economies, and should not be taken as just another default. While American banks are relatively protected, massive writedowns will continue to affect European banks, especially if countries on the brink tip over into defaulting. Greece itself may be small, but its shadow looms large.

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At the time this article was published Fool contributor Dan Newman does not own shares of any companies mentioned above. Follow him @TMFHelloNewman. The Motley Fool owns shares of Citigroup, JPMorgan Chase, and Bank of America. Motley Fool newsletter services have recommended buying shares of Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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