Third a Greek default could have implications for US commercial interests

Third a greek default could have implications for us

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Third, a Greek default could have implications for U.S. commercial interests. Although most of Greece’s debt is held by Europeans, $16.6 billion of Greece’s debt obligations are owed to creditors within the United States. Although not an insignificant amount of money, the relative size of U.S. creditor exposure to Greek bonds however is likely too small to create significant effects on the U.S. economy overall if Greece were to default. Fourth, the global recession has worsened the government budget position of a large number of countries. Some argue that credit markets may have awakened to the magnitude of the debt problem due to the large number of countries that are involved and the extent of the budget deficits. For example, some have argued that there are strong similarities between Greece’s financial situation and the financial situation in the United States. Like Greece, it is argued, the United States has been reliant on foreign investors to fund a large budget deficit, resulting in rising levels of external debt and vulnerability to a sudden reversal in investor confidence. Others point out that the United States, unlike Greece, has a floating exchange rate and its 20
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currency is an international reserve currency, which alleviates many of the pressures associated with rising debt levels. Fifth, debates over imbalances between current account deficit and current account surplus countries within the Eurozone are similar to the debates about imbalances between the United States and China. These debates reiterate how the economic policies of one country can affect other countries and the need for international economic cooperation and coordination to achieve international financial stability. Exposure of US Banks Given the interconnectedness of the U.S. and European financial sectors, another source of concern is how much U.S. banks could lose if Greece or other Eurozone countries were to default on their debts, or, in other words, how “exposed” U.S. banks are to Greece and other vulnerable Eurozone countries. Exposure to Greece Direct exposure of U.S. banks to the Greek government is relatively small. According to the Bank for International Settlements (BIS), it totalled $1.5 billion in December 2010. Direct U.S. exposure to Greece more generally, including the Greek government and the Greek private sector, was $7.3 billion in December 2010. However, U.S. banks may be more heavily exposed to Greece through what the BIS calls “other potential exposures.” The BIS defines “other potential exposures” as derivative contracts, guarantees, and credit commitments. U.S. bank exposure to Greece through these more indirect channels totalled an estimated $34.1 billion in December 2010, more than four times its direct exposure to Greece. By comparison 21
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European banks have more direct exposure to Greece, and relatively, less exposure through more indirect channels, than U.S. banks (see Figure 5). Exposure to the Eurozone Broader contagion of the Greek debt crisis to the Eurozone poses a greater risk to U.S. banks.
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