Greek Panic Update

Greek Panic Update – It appears that, as hypothesized here three months ago, the Greek debt crisis may actually be another Basel-induced banking crisis.

Basel II (adopted outside the United States in 2007, but not yet adopted here, where Basel I (1991) and the Recourse Rule (2001) are still in effect) gave a zero risk weight to government bonds rated AAA to AA-; a 20 percent risk weight to government bonds rated A+ to A-; and a 50 percent risk weight to government bonds rated BBB+ to BBB-.

On April 21, Moody’s downgraded Greek debt to BBB+, suddenly requiring banks holding A- Greek government bonds to raise 60 percent more capital for these securities. Portugal’s AA rating is under pressure (according to Moody’s), as is Spain’s (according to S&P), although Italy’s Aa2 (AA) Moody’s rating, and S&P’s rating of A+, seem stable. According to yesterday’s New York Times, “French and German banks…have $1.16 trillion at risk in Spain and Italy, including government and private debt.”

The downgrade pressures on banks are in addition to the default threat from Greece. Yesterday’s Financial Times reports that “French and German banks and insurance groups…hold just under 80 billion euros in Greek sovereign debt,” and that banks are afraid to lend to each other for fear of counterparty insolvency. According to Bloomberg, “The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers.” Another FT story reports that “worried bankers from 47 European groups urged the ECB to become a ‘buyer of last resort’ of eurozone government bonds to steady markets. There was speculation that the central bank could be preparing a $762 billion loan facility for one-year loans at 1 percent to help more than 1000 banks in their funding.”

And from today’s NYT: “United States banks have $3.6 trillion in exposure to European banks.”

About Jeffrey Friedman 4 Articles

Affiliation: University of Texas, Austin

Jeffrey Friedman is a political scientist and the editor of Critical Review: An Interdisciplinary Journal of Politics and Society.

Friedman graduated from Brown University in 1983 with a double major in History and Philosophy, and received an MA in History at the University of California, Berkeley, in 1985 and a Ph.D. in Political Science from Yale in 2002. He taught in the Government department at Dartmouth College in 1998, the Social Studies program at Harvard from 1998 to 2000, and the Political Science department at Barnard College, Columbia University from 2001 to 2006.

In 2006 he resigned from the Barnard faculty to edit Critical Review, which he had founded in 1986. The initial purpose of the journal was to bring critical scrutiny to bear on libertarian scholarship, and to subject mainstream scholarship to similar scrutiny. As part of this effort, Friedman published an article, "What's Wrong with Libertarianism," that prompted wide discussion among libertarian writers. Since then, the journal has evolved into a scholarly forum for critically assessing the realities of democracy and capitalism, emphasizing the actual functioning of democracy in the light of political scientists' findings of "public ignorance" of political affairs, and related questions such as electoral "mandates," media bias, academic bias, and the autonomy of state officials from public scrutiny. Friedman's articles "Public Opinion and Democratic Theory" (1998), "Public Opinion: Bringing the Media Back In" (2003), and "Popper, Weber, and Hayek: The Epistemology and Politics of Ignorance" (2005) addressed these issues.

Friedman is a visiting scholar in the Government Department of the University of Texas at Austin, and the Max Weber Fellow of the Institute for the Advancement of the Social Sciences at Boston University.

Visit: Critical Review, Causes of the Crisis

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