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A Greek default may cripple the German banking sector

May 17, 2011

The Greek crisis should be serious concern for Germany, yet not for altruistic reasons. Nor are the adverse effects of a broken euro zone on the export sectors of the net-exporters the main issues that Merkel, Sakozy and others should worry about.
It’s the banking sector, stupid!

Desmond Lachman sums up the concerns of ECB chief economist Jürgen Stark:

Mr Stark’s concern was not simply that a Greek default would all too likely result in contagion to Ireland, Portugal, and Spain. Nor was it that this would have dire economic consequences for those countries’ economies. Rather, his main concern was about the potential damage that a wave of defaults in the European periphery would have on the German, French, and United Kingdom banking systems.
For Mr. Stark knows that the combined sovereign debt of Greece, Ireland, Portugal, and Spain totals around U.S.$2 trillion and that a large proportion of that debt is held by the European banking system. He also knows that a possible 30 percent average write down of that debt could inflict losses on the European financial system in an amount that is all too similar to that inflicted on the U.S. banking system by the sub-prime loan crisis in 2008.

Some data here:

involvement in the peripheral banking sectors

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