GreecesUnpleasantArithmetic

ContainingtheThreattotheGlobalEconomy
JamesR.Barth,Tong(Cindy)Li,andApanard(Penny)Prabhavivadhana1

ItmayseemoddthatGreece,whichaccountsforonly0.16percentoftheworldspopulation
and0.43percentofitsGDP,hasthepotentialtotriggeranotherglobalrecession.Thefactthat theUnitedStatesdidsothreeyearsagowasnobigsurprise(thoughahugedisappointment), givenitsfootprintintheglobaleconomy.Yetstrangeasitmayseem,Greece,despiteitssmall size,isedgingeverclosertoseverelydisruptingglobalfinancialandeconomicmarketsunless decisivecorrectiveactionistaken. Howdidwegettothispoint?TheunderlyingnumbersbehindGreecespublicfinances provideperspectiveandrevealsomeunpleasantarithmetic(toborrowaphrasefromNobel PrizewinnerThomasSargent). Asfigure1indicates,GreecehadthehighestdebttoGDPratioamongthesocalled peripherycountriesofEurope(Greece,Ireland,Italy,PortugalandSpaintheGIIPSorthePIIGS, astheyvebeendubbed);itstoodat143percentin2010.Bywayofcomparison,the correspondingratiosforFrance,Germany,andtheUnitedStateswere77,58,and68, respectively.Greecesdeficitatthesametimewas10.4percentofGDP,whichwashigherthan alltheothercountriesinfigure1exceptIreland.Incomparison,thecorrespondingratiosfor France,GermanyandtheUnitedStateswere7.1,3.3,and10.3,respectively. Duetoitsalarminglyhighratios,Greecereachedanagreementwiththeothereuro zonemembercountries,withthebackingoftheIMF,forabailoutof$145billion(110billion) inMay2010.2Ofthisamount,$40billion(30billion)wasmadeavailableimmediately,with theremainingportiontobeprovidedafter2010.Inexchange,Greecewastoimplementfiscal austeritymeasureswiththegoalofreducingitsdeficittoGDPratiosufficientlysothatitcould onceagainbeginissuingsovereigndebtatreasonableinterestratesby2013. Greececontinuedtostrugglewithitsfiscalproblems,however,sotheEUannounceda newprograminJuly2011.Itprovided$157billion(109billion)inanotherbailoutforGreece, structuredtoincludelowerinterestratesandextendedmaturities.Unfortunately,despite theseefforts,thingscontinuedtodeteriorate. OnOctober2,2011,theGreekgovernmentpubliclystatedthatitsdeficitfortheyear wouldbe8.5percentofGDP,exceedingthetargetof7.8percentsetunderthetermsofthe
JamesR.BarthistheseniorfinancefellowattheMilkenInstitute,aswellastheLowderEminentScholarin FinanceatAuburnUniversity.Tong(Cindy)LiisasenioreconomistandApanard(Penny)Prabhavivadhanaisan economist,bothwiththeMilkenInstitute. TheauthorswishtothankFranklinAllen,RossLevine,ClasWihlborgandThomasD.Willettfortheirhelpful comments. 2 TheMaastrichtTreaty,whichtookeffectonNovember1,1993,createdtheEuropeanUnion(EU)andledtothe creationoftheeuro.ItspecifiedthatEUmemberstatesadoptingtheeurowerenottolettheirratioof governmentdeficittoGDPandtheirratioofgovernmentdebttoGDPtoexceed3percentand60percent, respectively.
1

1
Electronic copy available at: http://ssrn.com/abstract=1945937

originalbailout.Thisdisturbingnewsmeansthatwithoutdrasticaction,itsdebttoGDPratio willrisetoevenmorealarminglevelsinthecurrentandsubsequentyears.Indeed,theratiois reachinglevelsatwhichitbecomesextremelydifficult,ifnotimpossible,foracountrytoavoid defaultonitsdebt.3 Figure1.DeficitsanddebtfortheGIIPScountries,2010

General government net debt (% of GDP)
Greece Italy Portugal Ireland Spain 48.7 99.4 88.7 78.0 142.8

Government deficit (% of GDP)

Ireland Greece Spain Portugal Italy 4.5 10.4 9.2 9.1 32.0

Sources:WorldEconomicOutlook,InternationalMonetaryFund;MilkenInstitute.

Clearly,thehighandrisingdebttoGDPratioputsanextremelyheavyburdenonthe Greekgovernment,botheconomicallyandpolitically,ifitistobereducedtoamore manageablelevelsolelythroughexpenditurecutsandtaxincreasesaswellasthesaleofpublic assetstotheprivatesector.Indeed,thefiscalausteritymeasuresmaybesoseverethatthey impedeeconomicgrowthsothatwhateverloansGreecereceivesmaysimplypostponerather thanavoidadefault. Thisisnotmereidlespeculation.ConsiderS&Pscreditratingsforthesovereigndebtof theGIIPScountries.Startingin2009,thesovereigndebtofGreecehasbeendowngraded severaltimes,mostrecentlytoalowratingofCConJuly27,2011.Thisisafarlowercredit ratingthanthoseassignedtothedebtofanyoftheotherGIIPScountries,indicatingamuch higherlikelihoodofdefaultonGreekdebt.(Bycomparison,FranceandGermanystillretain theirAAAratings,whilethecreditratingoftheUnitedStateswasdowngradedtoAA+from AAAonAugust5,2011.)

AccordingtoCarmenM.ReinhartandKennethS.RogoffinThisTimeIsDifferent:APanoramicViewofEight CenturiesofFinancialCrises,NBERWorkingPaperNo.13882(2008),Greecehasdefaultedonitssovereigndebt atleastfiveprevioustimesinthemodernera(1826,1843,1860,1894,and1932).Itisalsoinstructivetonotethat JapanhasanetgovernmentdebttoGDPratioof130.6percentandamuchhighergrossgovernmentdebtto GDPratioof233.1percent.Butonly15percentofitsdebtisheldabroad.Bycontrast,91percentofGreecesdebt isheldabroad.

2
Electronic copy available at: http://ssrn.com/abstract=1945937

 Figure2.S&PssovereigndowngradesfortheGIIPScountries
S&P's foreign currency long-term debt ratings
AAA AA A BBB BB B CCC CC

Spain Italy Ireland Portugal Greece 2007 2008 2009 2010 2011

2006

Source:Bloomberg;MilkenInstitute.

Inadditiontoitslowcreditrating,theinterestratethatGreecehastopayonits sovereigndebtindicatesanescalatinglikelihoodthatGreecewillhavetosubstantiallywrite downitsdebt.Asfigure3shows,theyieldspreadbetweenGreekandGermansovereigns reachedahighof22percentagepointsonSeptember23,2011.Suchawidespreadindicates thatinvestorsdonotconsiderGreeksovereignstobeworthanythingclosetotheirfacevalue, despitethefinancialsupportthusfarprovidedtoGreeceandthereformeffortsithas implementedtodate.Indeed,Greekdebthasbeentradinginrecentweeksatabout40cents onthedollar.4Baseduponthisrecoveryfigureandthedifferenceininterestratesbetween GreeceandGermany,theprobabilityofdefaultbyGreeceonitssovereigndebtstoodat 89percentasoftheendofSeptember2011.Therearesomeinvestors,ofcourse,whoconsider thisabuyingopportunitybasedontheirbeliefthatamplefundswilleventuallybeprovidedto Greecetoenableittoavoidadefault.

WallStreetJournal,October4,2011,pageC4.

Figure3.SovereignyieldspreadsbetweentheGIIPScountriesandGermany,weekly
Yield spread over 10-year German sovereigns, percentage points 25 20 15 10 5 0 2008

Greece Portugal Ireland Spain Italy 2009 2010 2011

Source:Bloomberg.

InvestorsperceptionofthelikelihoodofaGreekdefaultonitsdebtisalsoreflectedin thecreditdefaultswapmarket.Figure4indicatesthatthecosttoaninvestorofinsuring againstlossesonGreeksovereignsreachedarecordhighof6,752basispointsonSeptember26, 2011.TheCDSspreadhadbeentrendingupwardduringthepastyear,butitsriserapidly acceleratedafterJuly2011.Thespreadwasanenormous5,248basispointsasofOctober5, 2011.(Bycomparison,thespreadinbasispointsforPortugalwas1,140;forIreland712;for Italy474;andforSpain376.ThecomparablefiguresforthesovereigndebtofFrance,Germany, andUnitedStateswerefarlowerat185,108,and51basispoints,respectively.)Theprobability ofdefaultbyGreeceonitssovereigndebtis97percentbaseduponthedifferentpricesof creditdefaultswapsforGreeceandGermany.

Figure4.Sovereigncreditdefaultswapsspreads fortheGIIPScountriesreachrecordhighsinOctober2011
Five-year CDS spreads (basis points) 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 2006 2007 2008 2009 2010 2011 2011
Oct

1,400 1,200 Greece 1,000 800 600 400 200 0 2006 2007 2008 2009 2010 2011 2011
Oct

Portugal Ireland Spain Italy

Sources:Bloomberg;MilkenInstitute.

AlltheinformationpresentedthusfarindicatesthatGreececurrentlyisinfarworse shapethantheotherGIIPScountries.Twopossibleresponsestothedeepeningcrisisareas follows.5 OnealternativeistoprovideevenmoreoutsidefinancialsupporttoGreecebutsome eurozonemembercountrieshavebecomeincreasinglyreluctanttopursuethiscourse.Worse yet,suchsupportonlyaddstothedebtthateventuallyhastoberepaidbyGreece. Tocompoundproblems,Greeceisnottheonlyeurozonemembercountrywith difficulties.Inrecognitionofthissituation,theeurozonemembercountriesagreedtoestablish asubstantialamountoffunding/guaranteestoaddressfuturefinancialproblemsforall membercountriesonMay10,2010.Theamountagreedtowas$965billion(750billion),with $77billion(60billion)allocatedtotheEuropeanFinancialStabilityMechanism;$566billion (440billion)totheEuropeanFinancialStabilityFacility;and$322billion(250billion)inthe formofcreditsprovidedbyInternationalMonetaryFund.6Subsequently,inNovember2010, theEUandtheIMFandthreenations(UnitedKingdom,Denmark,andSweden)agreedtoa bailoutof$88billion(67.5billion)forIreland.7ThiswassoonfollowedinMay2011witha $116billion(78billion)bailoutprovidedbytheEUandIMFtoPortugal.
Thereareclearlyotheralternativesbeyondthoseconsideredhere.Forexample,somesuggestthatGreece shouldgiveuptheeuroasitscurrencyandrevertbacktothedrachma.Sofar,however,itappearsthatthisisnot alikelyoutcome.Arelatedissueisthecreationofanacceptablefiscaluniontoaccompanythemonetaryunionfor theeurozonemembercountries. 6 AsofOctober8,2011,all17eurozonemembercountrieshadnotratifiedtheincreaseinthelendingcapacityof theEFSFto440billion. 7 Aspartofthepackage,Irelandsowncontributionwas17.5billion,whichwouldcomefromtheNational PensionReserveFundandotherdomesticcashresources.See http://www.finance.gov.ie/viewdoc.asp?DocID=6600.
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AllofthefinancialsupportprovidedtonotonlyGreecebutalsotoPortugalandIreland hasclearlynotyetsolvedthesovereigndebtproblemsofthesecountries,asthevariousdata mentionedaboveindicate.Furthermore,thismayonlybethetipoftheiceberg.Therearealso potentialproblemsinthefarbiggercountriesofSpainandItalythatmayrequireoutside financialsupport.Indeed,asofearlyOctober2011,theEuropeanCentralBank,throughits SecuritiesMarketProgram,haspurchasednotonlythesovereigndebtofGreece,Portugal,and Ireland,butalsothesovereigndebtofSpainandItalyintheaggregateamountof$220billion (163billion).8OnOctober7,moreover,FitchdowngradedthesovereigndebtofSpainfromAA plustoAAminusandItalyfromAAminustoAplus. Figure5indicatesthatSpainandItalytogetherhavesovereigndebtof$3trillionas comparedtoatotaldebtof$805billionforGreece,Ireland,andPortugal.AlthoughFranceand GermanyarethetwobiggestEuropeaneconomiesintermsofGDPandareinbetterfinancial shapethantheGIIPScountries,relyingonthemtohelppreventadefaultonatotaldebtof $3.8trillionismostlikelyaskingthemtoassumetoobigaburden,bothfinanciallyand politically. Figure5.ComparisonofGDPandsovereigndebtofEurozonecountries
GDP (annualized, US$ billions), Q2 2011 Sovereign debt (US$ billions), July 2011
Other euro zone countries $1,303 (15%)

Ireland $218 (2%) Portugal $238 (2%) Greece $293 (2%)

Other euro zone countries $2,833 (21%) Spain $1,501 (11%)

Germany $3,528 (26%)

Ireland $128 (2%) Portugal $192 (2%) Greece $485 (6%) Spain $814 (9%)

Italy $2,210 (25%)

Italy $2,172 (16%)

France $2,741 (20%)

Germany $1,769 (20%)

France $1,840 (21%)

Note:OthereurozonecountriesincludeAustria,Belgium,Cyprus,Estonia,Finland,Luxembourg,Malta,the Netherlands,SloveniaandSlovakia.GDPandexchangeratedataforGreeceandLuxembourgareQ12011. Sources:ECB;OECD;quarterlyGDPdatafromBloomberg;exchangeratesfromThomsonReuters;MilkenInstitute.

AsecondalternativefordealingwiththecrisisisforGreecetodefaultonitsdebt(i.e., restructureitsdebtthroughasubstantialwritedowninitsfacevalue,perhapsof50percentor more).ThisshiftssomeoftheburdenfromtheGreekgovernmenttotheinvestorsinits sovereigndebt.Thiswouldsubstantiallylightenthepoliticalburdenofthegovernmentand

Seehttp://www.ecb.int/press/pr/date/2011/html/pr111006_4.en.htmland http://www.ecb.int/press/pr/date/2011/html/pr111006_3.en.html.Itshouldbenotedthattheloansprovidedby EuropeanCentralBankareonlymeanttodealwithliquidity,notsolvencyproblems.
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makethefiscalmeasuresneededtoachievetheearlieragreedupondeficittargetsmore manageable. However,themajorconcernwithsuchanactionisthatsomeofthisdebtisheldby banks.Thismeansthatanywritedownofthedebt(beyondanythathavealreadybeentaken) wouldadverselyaffectthefinancialconditionoftheseinstitutions. Figure6showsthatthetotalexposureofnonGreekEuropeanbankstoGreekdebtis $43billion,whilethetotalexposureofnonEuropeanbanksis$2billion.Itisclearthatnearly allthedebtexposurelieswithEuropeanbanks,whichraisestheconcernofcontagion throughoutthefinancialsectorofEurope,asinvestorsmightexpectwritedownsofsovereign debtofnotjustGreecebutalsoofothereurozonecountries. AlmosttwothirdsoftheexposureofGreekdebt,moreover,isatFrenchandGerman banks.ThedirectexposureofU.S.bankstoGreeksovereigndebtisnegligibleincomparison.9 (However,someU.S.banksdohaveexposuretothesovereigndebtofothereurozone countriesthatcouldbeadverselyaffectedbyaGreekdefault.Theyalsoserveascounterparties tocreditdefaultswapsissuedtoinvestorstohelpprotectthemagainstanylossesoneurozone countrysovereigndebt.) Figure6.BankexposuretotheGIIPScountriessovereigndebt (US$billions,March2011)
European banks French banks German banks Non-European banks U.S. banks $25 $51 $48 $105 $29 $19 $8

$233 $33 $3 $9 $14 $3 $9 $13

$90

$43

$33 $15

Italy Spain Greece Portugal Ireland

Note:Thedataarefor24countriesandonlyincludecrosscountryholdings. Sources:BankforInternationalSettlements(BISQuarterlyReview,September2011);MilkenInstitute.

ManyEuropeanbankshavenotyetwrittendowntheirholdingsofGreeksovereignsto thelevelatwhichtheymightultimatelyhavetoinanydebtrestructuring.Asaresultofany
TheU.S.bankingsystemsexposuretotheGIIPScountriessovereigndebtwas$25billionasofMarch2011.In additiontotheseclaims,theU.S.bankingsystemsexposuretoGIIPSbankingsystemandGIIPSnonbankprivate sectorwas$61billionand$89billion,respectively(BankofInternationalSettlements,BIS Quarterly Review, September 2011).ThereisalsoexposureatU.S.moneymarketfunds.
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furtherwritedowns,thesebanksmayfinditnecessarytoraisecapital,especiallyinviewofthe newandhighercapitalrequirementsunderBaselIII.Totheextentsuchbanksareunableto raisesufficientcapitalontheirown,theirgovernmentsmightfinditnecessarytomaintain stabilitybyrecapitalizingthebanksthemselves. Thisonlyaddstothefiscalchallengesthatmanyeurozonegovernmentsarecurrently confrontingandtopotentialdisagreementsamongthedifferentnationalgovernmentsabout howbesttoproceed.Withrespecttothelatterissue,itisreportedthatGermanyprefersthat thebankstakeeffortstorecapitalizethemselvesand,iftheycannot,tohavetheirnational governmentsrecapitalizethem.InthecaseofFrance,however,reportsindicatethatitis concernedthatifitbailsoutitsbanks,itwilljeopardizeitsAAArating,whichcouldraisethe interestrateonnewlyissuedsovereigndebt.Franceisthereforereportedtofavormaximizing theuseoftheexistingemergencyrescuefunds. Butthestorydoesnotstophere.ThedoubtsswirlingaroundGreece,Ireland,and Portugal10alsocreateuncertaintyaboutothercountries,includingItalyandSpain,aswellas whetherthepoliticalresolveandeconomiccapacityexiststoconfrontthoseissues.Ifthe problemsweretospreadtothefarbiggercountriesofSpainandItaly,theconsequencecould benumerousescalatingandcostlysovereigndebtandbankingcrises.This,inturn,couldlead toasevereEuropean,andevenglobal,recession. Thecurrentsituationintheeurozonecountriesisthereforeexacerbatedbyuncertainty, whichisalwaysthebiggestenemyofwellfunctioningfinancialmarkets.Theoverridingpieceof uncertaintyconcernstheultimatemagnitudeandlocationofthepotentiallosseswithinthe financialandfiscalsectorsofthedifferenteurozonemembercountries.Additionalanxiety stemsfromwhetherthevariousentitiescapableofprovidingfinancialsupporttohelpcover suchlosseswillagreeinatimelymanneroncorrectiveaction,eliminatingthethreatof contagionbyputtingallthecountriesinquestiononsustainablefiscalandeconomicgrowth paths. Figure7showsthatthecreditdefaultswapspreadsforEuropeanbanksrecently reachedrecordhighs,muchhigherthaneventhelevelstheyhitfollowingthecollapseof LehmanBrothersinSeptember2008.Thisfurtherunderscoresthewidespreadanxietyabout themagnitudeandscopeofthesovereigndebtandbankingproblems.Thisatmosphere,inturn, contributestoadeclineinconfidenceonthepartofconsumersandbusinessesanda correspondingdesiretospendlessandsavemoreintheformofsafeassetslikegold,theSwiss franc,andU.S.Treasurysecurities.Suchactionscurtailincreasesinemploymentandimpede theeconomicgrowththatisultimatelyneededtoreducethedebtanddeficittoGDPratiosto manageablelevels.

Irelandappearstohavebeentakingeffectiveactiontodealwithitsproblemasevidencedbytherecentdecline initscreditdefaultswapspread(Figure4)andasignificantnarrowingofitssovereignyieldspreadwithGermany (Figure3).

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Figure7.CreditdefaultswapspreadsforEuropeanbanksreachrecordhighs
Basis points 600 500 400 300 200 100 0 2006
Northern Rock taken over by U.K. Treasury (2/17/2008) JP Morgan Chase offers to acquire Bear Stearns at $2 per share (3/17/2008) Dow declines to the lowest level since 1997 (03/06/2009) Sovereign crisis rapidly intensifies in 2011

Lehman Brothers files for bankruptcy (9/15/2008)

The first Greek bailout (05/02/2010)

European Banking Authority is established (01/01/2011)

2007

2008

2009

2010

Europe subordinated financial

Europe senior financial

October 2011 Europe index

2011

Note:ThedataaretheMarkitiTraxxEuropeanSeniorFinancialindex,theMarkitiTraxxSubordinated FinancialIndex,andtheMarkitiTraxxEuropeindex. Sources:Bloomberg;MilkenInstitute.

Figure8showstheexposureofselectedEuropeanbankstothesovereigndebtofthe GIIPScountriesasofDecember31,2010,baseduponstresstestsperformedbytheEuropean BankingAuthority.11Ofthesixbanks,Dexiaisclearlythemostexposed,withanexposureto GIIPSsovereigndebtatnearly130percentofitscorecapital.Notsurprisingly,asofOctober10, 2011,adealhadbeenreachedtobailoutDexiaforthesecondtime,indicatingtheadverse impactoftheeurozonecrisisonthisbank.Theotherfivebankshavealsosignificantexposure tothesovereigndebtofGIIPScountries,withbyfarthemostexposuretoItaliandebt.The exposuretoGreekdebtissecondinimportanceforthebanks.ThefactthattheseareFrench andGermaninstitutionsexplainstherecentfocusbythetwonationalgovernmentson recapitalizingbanks. Recognizingtheproblemsoftheeurozonebanks,andinparticulartheirheavyreliance onshorttermprivatedebtthathassubstantiallydriedup,theEuropeanCentralBankreported onOctober5,2011,thatitwouldprovideunlimitedloanstobanksforaboutayearatthe benchmarkinterestrate(currently1.5percent).12Italsoreportedthatitwouldspend 40billiononbuyingcoveredbondsfrombanks.(Theappendixprovidesdetailontheexposure
Thesetestsweredeemedbymanytolackcredibilitybecauseregulatorsdecidednottotakeintoaccountthe possibilityofdefaultonsovereigndebt. 12 Seehttp://www.ecb.int/press/pr/date/2011/html/pr111006_4.en.htmland http://www.ecb.int/press/pr/date/2011/html/pr111006_3.en.html.
11

ofsomeofthebiggestglobalbankstotheGIIPScountriessovereigndebtaswellasrelated financialinformationonthesebanks.Italsoshowsthatnotonlyarebanksexposedtothedebt ofothercountries,butalsothedebtoftheirowncountry.) Figure8.IndividualbankexposuretotheGIIPScountriessovereigndebt (sixbankswithanexposuregreaterthan30%ofTier1capital) (US$billions),asofDecember31,2010

Dexia
Exposure = 129% of core capital
Italy Greece Spain Portugal Ireland $4.6 $1.9 $2.6 $0.0 $19.9 Italy Greece Spain Portugal Ireland $4.2 $1.3 $0.0 $4.0

Commerzbank
Exposure = 65% of core capital
$13.4

BNP Paribas
Exposure = 64% of core capital
Italy Greece Spain Portugal Ireland $6.6 $5.2 $2.7 $0.7 $32.0

Socit Gnrale
Exposure = 33% of core capital
Italy Greece Spain Portugal Ireland $2.9 $0.8 $0.6 $3.5 $4.4

Credit Agricole
Exposure = 34% of core capital
Italy Greece Spain Portugal Ireland $0.9 $3.7 $1.5 $0.2 $13.4 Italy Greece Spain Portugal Ireland

Deutsche Bank
Exposure = 31% of core capital
$7.1 $2.0 $2.8 $0.1 $0.6

Sources:Bloomberg;EuropeanBankingAuthority;MilkenInstitute.

Thegovernmentsoftheeurozonemembercountries,aswellastheEuropean Commission,EuropeanCentralBank,andtheInternationalMonetaryFund,amongother nationalgovernments,havebeenfacedwithsignificantfinancialandpoliticalchallengesin resolvingthisprecarioussituation.Thedualchallengeistoresolveboththesovereigndebt problemsoftheGIIPScountriesandtheassociatedbankingproblemsinthebroaderEuropean Union.Althoughdifferenttypesoffundamentalfactorscreatedtheproblemsineachcountry 10

(somerelatedtohighunitlaborcostsandalackofcompetitiveness,andothersrelatedtoreal estatemarketsandaheavyrelianceonexternaldebt),itisdifficultforanycountrytogrowits economywithoutabankingsystemsuppliesadequatecredittoconsumersandbusinesses.At thesametime,itisdifficultforbankstosupplycreditwithoutadequatecapitalinplace.And whetherornotbankshaveadequatecapitalishighlydependentuponwhathappenstothe valueofthesovereigndebtheldontheirbalancesheets. Letsreturntotheoriginalquestion:HowcanGreecemattersomuchgiventhatitisso small?TheansweristhatGreekdebtisrelativelysmall,butasufficientamountisheldbyafew majorbanksinEuropetocausedisruptionstothecreditsystemanddisruptionstothecredit systemwilladverselyaffecteconomicgrowth.Thiseffectismagnifiedbecauseotherbanks fromaroundtheworldareexposedtotheseEuropeanbanks,makingtheproblemglobal.Itis thereforeimperativethatEuropeannationalauthoritiestakemoredecisiveandcorrective actionstodealwiththeirbankingandsovereigndebtproblemstoheadoffaglobalbanking crisis.

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Appendix.SelectedbankexposuretotheGIIPScountriessovereigndebtaswellasbankfinancialconditioninformation
BankCDS Stockprice Bank'sselectedinformation Exposure(12/31/2010)(inUS$billions)
(4)

Bank

Country

5yearCDS Price(US$) (bps) YTDchange(10/7/2011 (10/7/11) ) %YTD Ireland Italy Portugal Spain

Market Common Tier1 cap/ TA(US$bn) equityto capital Common Greece (Q22011) TA(%)(Q2 ratio(Q2 equity(%) 2011) 2011) (3) GIIPS 831 1,333 935 2,261 2,323 937 1,573 1,680 1,788 825 1,957 2,795 2,313 2,399 992 1,469 1,800 568 2,684 2,691 2,247 1,160 1,260 751 7.21 2.71 5.96 7.79 3.20 9.90 1.34 3.49 3.82 18.1 n.a. 13.9 14.0 12.2 12.4 18.2 11.7 11.4 3.35 11.6 3.45 13.5 2.78 11.0 27.8 37.7 36.4 78.4 46.0 120.0 44.8 88.3 68.4 83.7 103.9 21.9 3.54 11.9 51.6 9.00 13.55 40.8 nil 6.63 0.87 0.12 4.04 0.04 0.99 nil 2.00 1.22 nil 0.13 n.a. 4.59 6.34 9.8 81.0 0.17 5.97 10.4 67.1 0.23 3.57 11.3 35.5 3.52 0.59 0.00 0.00 nil 0.66 0.18 0.54 0.03 nil 0.12 nil 0.63 0.18 0.19 nil n.a. 0.00 4.59 11.6 51.4 0.00 0.00 7.39 14.7 70.2 nil nil nil 0.04 4.43 0.35 5.17 9.5 32.00 13.43 3.87 13.44 3.00 7.57 nil 7.08 5.12 5.29 3.30 n.a. 19.92 5.17 13.5 33.7 1.53 0.53 6.18 9.09 11.0 29.1 0.10 0.41 1.27 0.04 0.28 nil 0.00 0.84 4.82 0.86 nil 2.70 1.47 1.56 1.29 0.03 0.92 nil 0.11 0.42 nil 0.13 n.a. 2.56 9.14 11.8 32.5 0.82 0.15 76.46 0.09 7.04 9.1 23.7 0.85 0.08 62.95 0.11 7.01 16.7 47.2 nil nil 1.73 nil nil 2.53 1.01 0.10 0.50 nil 0.08 2.95 55.47 70.92 nil 5.18 3.68 7.29 4.20 nil 2.33 nil 2.76 0.84 0.94 nil n.a. 1.92 1.73 66.52 78.54 1.92 9.02 nil 0.12 12.32 60.87 77.12 9.5 47.16 19.63 13.38 23.01 3.07 11.93 nil 12.59 7.78 6.42 3.58 n.a. 28.98

Exposureto Exposureto GIIPS(%core GIIPS(% Tier1capital) coreTier1 (excludeown) country capital) (5) exposure 3.27 140.42 226.26 1.53 11.53 nil 0.20 33.37 109.24 233.06 7.53 64.21 31.97 21.81 64.88 8.15 29.09 nil 31.26 6.75 4.50 8.92 n.a. 128.46 3.27 7.53 5.99 1.53 11.53 nil 0.20 33.37 9.69 18.73 7.53 64.21 31.97 21.81 64.88 8.15 29.09 nil 31.26 6.75 4.50 8.92 n.a. 128.46

MorganStanley 267 221 207 248 237 146 135 169 146 36 58 69 128 68 100 101 51 102 76 75 76 59 54 n.a. 1.13 24.54 20.6 65.7 25.81 34.5 30.70 27.6 7.92 21.8 35.01 33.1 20.65 23.1 7.55 22.6 11.48 30.8 2.37 60.3 2.56 37.1 7.18 43.6 42.25 33.7 24.63 47.9 8.64 14.7 8.48 20.1 27.47 49 0.54 47.2 92.69 44.9 0.37 39.5 5.90 55.8 1.71 32.9 1.15 44.4 14.24 47.7

(1)

UnitedStates

435

UniCreditSpA

Italy

405

IntesaSanpaolo

Italy

403

BankofAmerica

UnitedStates

400

RBS

UnitedKingdom

363

GoldmanSachs

(1)

UnitedStates

360

LloydsTSB

UnitedKingdom

341

SocitGnrale

France

330

BancoSantander

Spain

308

BBVA

Spain

305

Citigroup

(1)

UnitedStates

292

BNPParibas

France

243

CreditAgricole

France

238

Barclays

UnitedKingdom

220

Commerzbank

Germany

216

UBS

(2)

Switzerland

201

ING

Netherlands

196

StandardChartered

(2)

UnitedKingdom

195

DeutscheBank

Germany

182

HSBCBankPLC

UnitedKingdom

164

JPMorgan

(1)

UnitedStates

160

CreditSuisse

Switzerland

160

WellsFargo

UnitedStates

159

DexiaSA

Belgium

n.a.

12

Sources:Bloomberg.ThegrossexposuredataforEuropeanbanksarefromEuropeanBankingAuthorityunlessnoted;exposuredataforU.S.banksarefromtheir10Kannual reports.ExposuredataforCreditSuisse,UBSandStandardCharteredarefromtheirannualreports,2010. (1) GoldmanSachs,CitigroupandJPMorgan(MorganStanley)donotreportcrossborderexposurestocountrieswithcrossborderoutstandinglessthan0.75%(1%)ofthe banksconsolidatedassets. (2) StandardCharteredannualreport,2010,statedthatthebanksexposuretoGIIPSsovereigndebtislessthan0.5%ofthetotalassets,whichisnegligible.UBSannual reporthasonlythelargestfiveexposurestosovereignofindustrializedEuropeancountries. (3) Marketcapitalizationisasof10/7/2011. (4) Grossexposures(long)netofcashshortpositionofsovereigndebttoothercounterpartiesonlywherethereismaturitymatching. (5) Excludesexposuretoitsowncountry.

13