Just when it seemed that noth­ing could pos­si­bly sur­prise about adverse Greek bank expo­sure, as these are beyond insol­vent already rely­ing on the ECB for day to day oper­a­tions as is, here comes one more devel­op­ment, this time cour­tesy of the one index that has been in lit­eral freefall in the past two months, and recently hit a 20+ year low — the Baltic Dry.

OpenEu­rope explains:

Another Expo­sure Which Could Sink Greek banks

An inter­est­ing but niche issue has come to our atten­tion recently in rela­tion to the on-going trou­bles in Greece. The 'Baltic Dry Index' (a mea­sure of global ship­ping demand/prices) has fallen for a month straight to record lows. When this index falls it sug­gests that there is trou­ble in the ship­ping indus­try, rais­ing ques­tions over the sta­bil­ity of ship­ping firms. As it turns out many of these firms have secured their financ­ing from Greek and other Euro­pean banks – mean­ing if they start default­ing on their loans these banks could take losses. This raise fur­ther ques­tions over the bank recap­i­tal­i­sa­tion plans and whether such con­tin­gen­cies have been thought of in the sec­ond Greek bailout (which sets aside €20bn for Greek banks).

As a recent NYT arti­cle noted:

“Basil Karatzas, the chief exec­u­tive of Karatzas Marine Advi­sors, a ship bro­ker­age and finance advi­sory firm in Man­hat­tan, esti­mated that Euro­pean banks hold about $500 bil­lion in ship­ping loans on their books and face nearly $100 bil­lion in losses to restruc­ture them.”

Fur­ther­more, not only does global demand seem to be fal­ter­ing (although the index may not be the best judge of this), there is also a mas­sive over sup­ply of ships – due to orders put in dur­ing the boom period in 2008 which are only just being com­pleted now (the equiv­a­lent of 22.7% of the cargo ship­ping fleet is due be pro­duced this year alone). This sug­gest a com­bi­na­tion of sup­ply and demand issues which means this could become a last­ing prob­lem and will not just be tack­led with a boost in growth in Asia.

Data on expo­sure to ship­ping loans is scarce, but in 2010 Greek banks had a port­fo­lio of $16bn just on Greek owned ship­ping. Other Euro­pean banks had about a $50bn expo­sure. Of this the 4 largest UK banks had $16bn and 10 Ger­man banks had $18bn.

The volatil­ity of the index should be kept in mind but it’s an inter­est­ing fresh angle on the prob­lems in Europe. If things keep going badly in the ship­ping sec­tor, which it seems almost cer­tain they will, some banks could face an increase in the level of non-performing loans on their books. Given that cap­i­tal buffers already seem to be spread pretty thin this could cause prob­lems. Of course this could take time to have an impact, if it does at all, but worth keep­ing an eye on.

Read more from the author/contributor here.

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