It appears that, as hypothesized here three months ago, the Greek debt crisis may actually be another Basel-induced banking crisis.
Basel II (adopted outside the United States in 2007, but not yet adopted here, where Basel I (1991) and the Recourse Rule (2001) are still in effect) gave a zero risk weight to government bonds rated AAA to AA-; a 20 percent risk weight to government bonds rated A+ to A-; and a 50 percent risk weight to government bonds rated BBB+ to BBB-.
On April 21, Moody’s downgraded Greek debt to BBB+, suddenly requiring banks holding A- Greek government bonds to raise 60 percent more capital for these securities. Portugal’s AA rating is under pressure (according to Moody’s), as is Spain’s (according to S&P), although Italy's Aa2 (AA) Moody's rating, and S&P's rating of A+, seem stable. According to yesterday's New York Times, "French and German banks...have $1.16 trillion at risk in Spain and Italy, including government and private debt."
The downgrade pressures on banks are in addition to the default threat from Greece. Yesterday's Financial Times reports that "French and German banks and insurance groups...hold just under 80 billion euros in Greek sovereign debt," and that banks are afraid to lend to each other for fear of counterparty insolvency. According to Bloomberg, "The cost of insuring against losses on European bank bonds soared to a record, surpassing levels triggered by the collapse of Lehman Brothers." Another FT story reports that "worried bankers from 47 European groups urged the ECB to become a 'buyer of last resort' of eurozone government bonds to steady markets. There was speculation that the central bank could be preparing a $762 billion loan facility for one-year loans at 1 percent to help more than 1000 banks in their funding."
And from today's NYT: "United States banks have $3.6 trillion in exposure to European banks."