Greek Debt Crisis Gives Big Banks a Chance to Be the Heroes

Greece Athens riot
Greece Athens riot

As protests from Greece's enraged public heat up and rioting in Athens turns deadly, and European political leaders bicker on, a predictable story is playing out in the financial markets. Currency markets continued their sell off of the euro on Wednesday as pressure mounted on the bonds of overly indebted Western European nations. And ratings agency Moody's (MCO) seemed poised to pour more fuel on the fire as it mulled a downgrade of Portugal's debt.

But behind the reports streaming in about fiscal and political turmoil, investors may find an unlikely source of relief. Many big private banks, considered the villains of the current financial crisis, are now playing a more supportive role, and their decisiveness could be an especially big help given the ongoing political gridlock.

News that the Greek government had hired investment bank Lazard(LAZ) was the latest report to turn investors' heads. When it comes to helping struggling countries or companies with debt, it's hard to find a more seasoned advisor than Lazard: Its clients have included Argentina during its crisis a decade ago to beleaguered American cable operator Charter Communications in 2008.

Lazard pointed out that Greece had no intention of undergoing a debt restructuring that required existing bondholders to take a haircut. That should be reassuring, given Standard & Poor's calculations that losses on Greek bonds could be as high as 70% in the event of a default.

Many of the holders of that Greek debt, and that of other struggling sovereigns, are the European banks. As of 2009, European banks held claims of $193 billion on Greece, and more than $1 trillion in bonds from Portugal, Ireland and Spain, according to research firm Roubini Global Economics.

Major Banks Voluntarily Keeping Greece Afloat

As currently proposed, the Greek aid package lacks any imposition of requirements on these creditors' future behavior, a key gap in the plan. "Conspicuously absent in a package of this magnitude is a private sector involvement mechanism," the Roubini firm wrote in a note to clients. "One example would be to formally require banks to keep rolling over their loans to Greek banks and to the government rather than taking advantage of official financing to reduce their overall exposure."

But even without governmental requirements, many banks so far have been highly accommodating. Deutsche Bank (DB) CEO Josef Ackermann reportedly pledged up to 500 billion euros in credit to Greece on the same terms its offers to the German government, while financial services giant Allianz is in talks for about 300 billion euros, and Munich Re could provide an additional 200 billion euros, Roubini notes.

The banks are already on the hook in a big way, of course, and they stand to gain considerably if the panic quiets. But their sudden generosity would also go a long way in repairing the industry's shattered reputation in the wake of the financial crisis.

That tarnished image is especially problematic in Europe. While some on Wall Street may regard the infamous investment bank Goldman Sachs (GS) as a hero, the German state of Bavaria has already cut off relations with Goldman based on the fraud allegations it's facing. The deadly fire-bombing in Greece was targeted at a bank, illustrating the public fury against them.

Deutsche Bank, in particular, is under pressure to win back some of the public's good opinion. Its shares took a beating following the Goldman Sachs fraud charges, in part because of the similarity in their business lines.

Having big banks as accommodating rather than antagonistic creditors could go a long way in helping ease the pain of the European debt crisis. And given the level of political fiddling under way as Europe's governments meander toward a solution, the virtues of the private banking sector -- like its ability to make decisions quickly and unilaterally -- may soon be appreciated again by a grateful public.