Lets recap my arguments from the early parts of this series. In Part 2 of the series I showed that if the Greek sovereign defaults either (a) it leaves the Euro and forces all Greek companies to convert all cash assets and liabilities to Drachma or (b) the Greek institutions including – say National Bank of Greece – will wind up going bust. In the archetypical sovereign default with a fixed currency (Argentina) not only did the sovereign default – but all private debts got redenominated in Pesos. I argued the same must happen in Greece if Greece were to default because Greece would want to save their institutions. Nobody has argued why this won’t happen. Then again nobody has provided a decent mechanical explanation for how it does happen – we don’t know how to leave the Eurozone even if you want to.
In Part 3 of this series I showed you the balance sheet of Emporiki – the Greek controlled subsidiary of Credit Agricole. The balance sheet showed 8 billion euro of interbank funding funding the Greek business. I argued that if Greece went off the Euro those interbank funds would be repaid in Drachma with a loss determined by the post-default trading level of the Drachma.
Every Euro of deposits raised in Greece is a Euro that does not flow across the Greek-French financial border and it is a Euro not subject to devaluation if Greece were to go off the Euro standard.
In my view the real risk to Credit Agricole in Greece is NOT credit losses (their lending has not been outrageously bad). The real risk is that Greece leaves the Eurozone and the assets and liabilities of the Greek banks are revalued in Drachma.
Into this I want to throw a slide out from Credit Agricole’s recent presentation on how they are dealing with their Greek subsidiary. They are making a conscious decision NOT to pay Greek interest rates on term deposits – and they expect their deposit book to shrink from 22.5 billion Euro to 15.8 billion Euro. Presumably they will need to fund another 7 billion Euro from France.
What to call this? Double or nothing! If Greece leaves the Eurozone Credit Agricole has almost doubled their losses. But – if Greece stays in the Eurozone – hey – they make more interest margin for the next few years because they pay cheap French financing cost to fund Greek business. [Isn’t that how they got into this mess in the first place?]
They better hope I am not right. If I am I can expect the resignation and disgrace of Credit Agricole’s CEO. This is a dangerous game.