As it became clear that radical left-wing party Syriza would win this month’s elections, £6bn was pulled out of the Greek banks.
When Alexis Tsipras was sworn in as new Greek Prime Minister, after forming a coalition with populist right-wing party Independent Greeks, the Athens stock exchange fell nearly 10%.
Greek banking stocks fell 25%.
Exit, Pursued By Bear Market
As the Greeks embark on do-or-die debt negotiations with the European Union, the prospect of a Greek exit, or Grexit, looks a distinct possibility.
That could spark chaos in Greece, as its debts spiralled after being converted into drachmas, but what will it mean for the UK banks?
Greek Tragedy
Investors in Barclays (LSE: BARC) (NYSE: BCS.US), HSBC Holdings (LSE: HSBA) and Lloyds Banking Group (LSE: LLOY) (NYSE: LYG.US) don’t seem overly concerned at the moment.
After a brief mid-week dip all three banks, like the FTSE 100 as a whole, had recovered their poise by Friday.
The UK banks have minimal exposure to Greek debt. French bank Credit Agricole has most in Europe, according to a recent report by JP Morgan, along with BNP Paribas SA, Credit Agricole, Natixis, Societe Generale, Deutsche Bank and Commerzbank.
But even this is only between 0.1% and 0.9% of their loans book. Their bond holdings are “immaterial” JP Morgan said.
Grexit doesn’t scare Europe’s banks.
Bad Haircut Day
The EU has been working hard to contain any contagion from a Grexit, and now has a permanent sovereign rescue fund and elements of a banking union in place.
That may encourage the troika to take a hardline stance with Syriza, because if it forgives Greek debt, then Spain, Italy and the rest of southern Europe will want forgiveness as well.
Given that the Greeks can’t afford to repay their debts, default and Grexit looks baked in, possibly sooner rather than later.
The wider loss of confidence will inevitably spread to the UK banks, but otherwise they have immunity. The big question then is what happens to the rest of Europe.
Over Exposed
I vividly remember Black Wednesday on 16 September 1992, when Britain lost billions after being forced out of the Exchange Rate Mechanism (ERM) with Germany.
Unless Grexit is such a disaster that it terrifies Europe into accepting its current state of perma-depression forever, I believe the eurozone will eventually go way of the ERM.
The Bank of England has previously found that the big four UK banks have total exposure £578bn to Europe, equivalent to 268% of core capital.
They may have immunity to Grexit but the can’t avoid contagion from a full-blown eurozone breakdown. Although if that day comes, we will have a lot more to worry about.