The freshly brewing Greek financial crisis is not limited to the boundaries of Greece. Several other European banks from France and Germany have exposure amounting to nearly $ 125 billion. The German exposure to Greek debt includes €9.1 billion invested by Hypo Real Estate and €4.6 billion worth of Greek bonds held by Commerzbank.
The nervousness amongst investors was evident from the fact that several currencies dipped versus the dollar, including the Canadian dollar, which had recently flexed its muscles and gone above parity with the US dollar. However, the Greek crisis seems to have made the Canadian dollar pare some of its recent gains and it fell to below parity levels with the US dollar. The Australian and New Zealand dollars fell sharply against the US dollar suggesting that investors are turning risk averse due to the Greek outcome. The US dollar also rose versus the yen amongst other currencies. The Euro, which can be expected to the most affected due to it being the currency of denominations for the majority of Greek debt, also lost substantial grounds to the US dollar on the Greek rating downgrade. It appears that the dollar continues to dominate the world of currencies as the safe haven currency.
The Euro’s high exposure is the result of the ECB’s relaxed collateral rules prevalent since 2008, when the financial crisis intensified. These relaxed rules have proved a boon for Greek banks, which have used some of their Greek government holdings to secure cheap Euro loans. Now, with the Greek sovereign rating being cut, the value of the Greek bonds taken as collateral, is under question. As per a Moody’s report, Greek banks had about €68 billion in ECB funding at the end of March. While initially, the ECB’s lifeline extended to Greece may have helped contain the Greek debt crisis spreading to other parts of the world, the arrangement has its limitations. With Portugal also facing a downgrade, the possibility of a more widespread debt crisis is likely. If the ECB continues to salvage other debt ridden European nations, the value of the Euro could come under question.
However, not salvaging a crashing economy could have even worse implications for Europe and the Euro. Thus, the ECB along with Germany and the IMF are likely to be forced to offer a further bailout package to Greece, such that another round of financial turmoil is not created. All said and done, a sign of crisis anywhere seems to bring the US dollar sharply back into focus and it appears that the dollar still remains the preferred choice in times of economic upheaval.