Defaults and Downgrades Backpack Across Europe

“France, Germany Throw Support Behind Greece,” reads the alert on CNBC. “Agree Greece Will Remain Part of European Union.”

Really? They’ve “fixed” Greece? Again?

Well, it’s good enough to send the Dow up 200 points today: Just a communiqué, devoid of details, issued after a teleconference among the leaders of France, Germany, and Greece.

How many more times will Greece be on the precipice of default, only to be pulled back at the last minute…until the time comes when Greece will inevitably tumble over…and pull everyone else down with it?

No telling… But the credit default swap market isn’t buying this latest announcement. Traders still give Greece a 93.7% probability of default. Not as high as Monday’s record, but there aren’t many takers on the other 6.3% of that trade, you might say…

BNP Paribas, one of the big French banks, furiously denied a report in The Wall Street Journal that said US money market funds have told the bank to take a hike.

The article quoted an anonymous BNP executive: “We can no longer borrow dollars. US money-market funds are not lending to us anymore.”

BNP says the piece contained “erroneous information” — which is not the same thing as saying the claim is a lie. One of those “non-denial denials” we’re accustomed to hearing in Washington, DC.

True or not, the money market funds have ample reason to stop lending to BNP, as Eric Fry pointed out in his essay “Going Broke With Greece” in The Daily Reckoning last July. “Greek debt accounts for more than 1/20th of BNP’s net worth.”

“That number, while large, doesn’t seem too worrisome until you add in BNP’s exposure to the other PIIGS governments. The chart below tells the tale. Loans to PIIGS government debt represent nearly half of BNP’s net worth. And this figure does not include any of BNP’s loans to corporate borrowers in those nations.”

Direct Lending to the PIIGS Governments As a Percentage of Each Bank's Net Equity

Meanwhile, “the largest American money market funds,” Eric goes on, “have allocated an average of about 40% of their assets to European debt securities, most of which are issued by European banks.”

And BNP is shocked that the money market funds are pulling back now? As if they should self-immolate and break the buck, as Reserve Primary Fund did — the post-Lehman event that nearly froze world credit markets three years ago this week.

Once again, if you have to park short-term cash, a US T-bill fund is the way to go. “Your money won’t be worth as much,” writes Addison in the new issue of Apogee Advisory, mindful of the dollar’s diminishing purchasing power, “but at least you know you’ll get it back.”

As evidence the rating agencies haven’t lost their sense of irony, Moody’s downgraded two other big French banks today — Societe Generale and Credit Agricole.

BNP? It’s merely under review.

Meanwhile, Greece — in a futile attempt to step away from the abyss — has come up with a new “austerity measure.” It’s a property tax increase with a unique twist: They’ll be collected through homeowners’ electric bills.

Ingenious. Positively diabolical. Skip out on the tax, lose your power.

And it affects a lot of Greeks who acquired property in years gone by. “Because the drachma wasn’t a hard currency,” explains the German newsweekly Der Spiegel, “they invested their savings in property. Some 85 percent of the people’s wealth is invested in houses and apartments.”

The union whose members work for the state energy utility promise to fight back: They’ll simply stop sending electric bills.

Dave Gonigam
for The Daily Reckoning