Greece Is Scary
Well, Greece isn’t so much the problem, the problem is that European banks are overexposed to the possibility of a Greek default, which is already weakening their position and making it harder for American municipalities to finance their debt:
From a skating rink in Everett, Wash., to New York City’s schools to Chicago’s O’Hare International Airport, interest rates on some bonds have soared since late May and could rise even further because money-market investors are less willing to buy some of the $17 billion in municipal bond deals backed by Dexia SA, a Belgian-French bank shaken by its exposure to government debts in Greece.
The Greek debt crisis is hitting dozens of U.S. cities and towns even though they are thousands of miles away and don’t own any of the country’s bonds.
“We are far from Wall Street or Greece, but the impact is being absorbed to the core in small-town America,” said Kate Reardon, a spokeswoman for Everett, Wash., a city of 104,000 people, where interest costs are rising on a local rink and concert arena.
In the Perris Union High School District in Perris, Calif., which already was furloughing workers and considering pay cuts, borrowing costs have risen by $30,000 a month, or about two-thirds of the cost of a first-year teacher, who earns about $46,700.
When times were good, Dexia gave governments across the U.S. easy access to the same cheap financing tapped by homeowners and companies by agreeing to backstop their municipal bonds. In turn, the interest rates on more than 100 municipal bonds fluctuate through daily or weekly sales called remarketings, in which big investors can either roll over their holdings at market rates or opt out.
Few public officials knew about the lender’s vulnerability to Greece; Dexia has €4.3 billion ($6.11 billion) in direct exposure to the country’s debt, according to ratings firm Standard & Poor’s Corp.
This article doesn’t exactly trod new ground. We know from what happened in 2008 that the interconnectedness of the world financial system can be exposed in times of great stress and, before you know it, an investment bank fails and corporations have problems financing their day to day operations. Or, to go back a bit further, the housing market takes a dip and it turns out that one of the world’s largest insurance companies was selling credit default swaps for securities that contained all sorts of crappy mortgages whose value was somewhere between zero and unknown and thus the insurance company requires some $85 billion in emergency government assistance.
What the Journal’s article shows well is that the problem is with Dexia, that it loaned money to an irresponsible corrupt government and there is now a substantial risk that it will be caught holding the bag. To blame the Greeks for the fact Perris, CA’s borrowing costs have gone up $360,000 a year at current rates wouldn’t make much sense. Now, it could be the Perris government’s fault for not doing their due diligence on Dexia, but then again, Dexia is supposed to have all the smart people and know what the risks of lending money to the Greek government is.
As a committed defender of TARP and bailing out financial institutions in order to avoid mass misery, I could see myself being OK with some sort of bailout or deal that ended up rescuing Dexia from the full consequences of its bad judgement, but at the same time, I would be very clear that the banks are at fault and it’s the banks exposure to Greece that makes one not-so-large country’s fiscal madness an international concern.
