Sunday, June 26, 2011

U.S. Taxpayers to Pay for Greek Austerity Bank Losses


Three years after bailing out big American banks, US taxpayers might wind up on the hook to rescue financial giants across the pond as European regulators fail to address Greece's financial woes.
Greek parliament is set to vote Tuesday on a wildly unpopular austerity plan devised by the International Monetary Fund and EU regulators. International lenders say must be passed for the financially strapped country to get its next round of aid.

But even if the austerity measures -- the equivalent of Uncle Sam seeking to slash Social Security checks -- don't go through, Greece may still get a handout from European regulators because they understand that the continent's big banks aren't prepared to deal with the fallout of the country officially going broke.

"Regulators and banks are kicking the can down the road," says Nicholas Economides, a professor of economics at the New York University Stern School of Business. "Banks don't want to take losses. It's something similar to what banks were doing in the United States before the 2008 housing crisis."

US banks have practically no direct exposure to Greek bonds, but European banks own a huge chunk of the country's $467 billion worth of state debt, and as much as 90 percent of it hasn't been marked down a penny despite its diminishing value.

"For securities that are traded every day, it's inexcusable that they're not being marked down," says Economides. "When Citi was holding a pile of mortgages at the wrong prices, at least they had the excuse that they were not traded every day."

By postponing what's widely believed to be inevitable -- a Greek default -- European regulators are adding to the potential for a Lehman-style financial crisis, some industry observers say.

In a severe meltdown, US taxpayers could end up paying AIG-size bailouts for German and other European banks, which also have huge exposure in other troubled countries such as Ireland and Portugal and much worse balance sheets than their US counterparts.

Richard Bove, a veteran bank industry analyst, says the Fed will likely have to step in with bailouts for big European banks unless the European Central Bank gets its act together, forces write-downs and comes up with other remedies beyond further Band-Aid loans for Greece.

Delaying a default or a restructuring will mean bigger pain down the road for Greece and the banks holding its bonds, he says. "The bill gets bigger for these entities every day. Pay it now before it can't be afforded," Bove said.

Wall Street is already feeling some ramifications with investor jitters about Greece helping drag stocks down about 7 percent from their April peak and over 2 percent for the last two trading days since the confidence vote for Prime Minister George Papandreou.

"My concern is that the markets aren't taking this seriously enough," says Lance Roberts, CEO and chief economist for Houston financial planner Street Talk Advisers.

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