Standard & Poor's cut Greece's debt rating to one notch above default, meaning that any future bonds issued by the country will have to be supported by unsustainable interest rates. According to The Economist, Greece has three available alternatives which could mitigate the full impact of the crisis: bonds can be rolled over, the debt can be restructured with an extended maturity or a haircut can be applied to its outstanding debt.

TUTORIAL: Understanding The Credit Crisis

Although this third alternative would have the most significant impact of reducing the long-term debt burden, it will undoubtedly have major detrimental effects on domestic and international bondholders. Germany and other members of the EU have been decreasing their exposure to Greek debts at rapid rates, as spreads on credit default swaps increased by 2,000 basis points. (To learn more on the correlation of risk and governments, check out The Government And Risk: A Love-Hate Relationship.)

Countries at Risk
Greece has $358.9 billion dollars of outstanding debt, a burden which has increased by 86% in the last 27 months. Greek banks are naturally most exposed to their government's debt with an estimated total exposure of $100 billion. The Bank of International Settlements estimates that France, Germany and the United Kingdom are the most exposed foreign nations with Greek debt holdings of $80 billion, $45 billion and $15 billion respectively.

A haircut of 30-70% would cripple the balance sheets of the institutions most exposed to Greek fixed income write downs. BNP Paribas (OTCBB:BNPQY), for example, has 5 billion Euro in Greek debt holdings while Societe Generale (OTCBB:SCGLY) carries a 3 billion Euro exposure. A haircut at the higher end of the possible spectrum of 50-70%, as predicted by the S&P would cause many Greek financial institutions such as Alpha Bank (OTCBB:ALBKY) and the National Bank of Greece (NYSE:NBG) to require substantial bailouts.

American Banks
Even the U.S. banks holds $1.8 billion worth of distressed Greek securities with an additional $4.7 billion of holdings in the private sector. When all types of claims and exposures are considered, the United States has $43.1 billion dollars invested in Greece. Bank of America (NYSE:BAC) and JPMorgan Chase (NYSE:JPM) addressed the issue of deteriorating credit conditions in Greece, Portugal, Spain, Italy and Ireland in their latest quarterly reports. JPM does not provide a concrete breakdown of its figures but states "aggregate net exposures to these five countries as measured under the Firm's internal approach were less than $20.0 billion at March 31, 2011, with no one country representing a majority of the exposure".

Bank of America, on the other hand, shows its direct sovereign and non-sovereign exposures to the aforementioned countries; cumulative Greek exposure amounts to only $677 million. Other banks did not reveal their figures.

The Bottom Line
With a CCC debt rating and on the verge of bankruptcy, Greece is now forced to take drastic actions to handle its massive debt load. State asset sales, austerity measure and a steady restructuring process will bode more favorably for investors than either the suggested 70% haircut or the worst case scenario - default. (To learn more, see Credit Default Swaps: An Introduction.)

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