Formal Greek debt default and euro exit would have 'material' impact, boss of ASB's parent Ian Narev says, although 'forward planning' would cushion this

By Gareth Vaughan

Commonwealth Bank of Australia, ASB's parent and Australasia's biggest bank, sees a formal Greek debt default and exit from the Eurozone having a "material" impact on global markets, but believes its forward planning would soften the impact it felt from such a scenario, CEO Ian Narev says.

Speaking on a conference call yesterday after CBA revealed a 3% rise in its third quarter unaudited cash earnings to A$1.75 billion (about NZ$2.3 billion), Narev  was asked whether he thought a Greek default and euro exit would be a Lehman Brothers like event in terms of the mayhem it might cause in the global financial markets.

"The financial markets have for some time been looking at what might happen and for some time been seeing a Greek default and Greek exit from the euro as a possibility," Narev, a New Zealander who as a child starred in the television series Children of Fire Mountain, replied.

"And an organisation like ours plans for that scenario and knows what would happen. So I think there's a degree of forward planning for that possibility that would soften any impact, but the impact would still be material I think."

In its half-year results announcement in February, CBA said 4.6% of its credit exposures were in Europe, including A$1.550 billion of exposure to Spain, Ireland, Italy and Greece, the troubled European "PIIGS" nations. This comprised A$246 million in Italian sovereign debt, A$385 million of exposures with Italian and Spanish banks primarily through short-term deposits, and A$919 million of predominantly Irish and Spanish corporate counter-party exposures.

"The Group has less than A$25 million of corporate exposure to Greece and an insignificant exposure to Portugal," CBA said in February.

Meanwhile, yesterday CBA said it had A$132 billion worth of liquid assets at March 31.

'The fundamental problem remains'

Narev said the "base case" view at CBA was that spikes in volatility and uncertainty around the Eurozone would continue for longer than "weeks or months" because the fundamental problem, of high levels of sovereign debt, had yet to be tackled.

"As we look at it, the fundamental issue of the stock of sovereign indebtedness isn't being solved at the moment," said Narev.

Although the European Central Bank's Long-Term Refinancing Operation (LTRO), which lent €1 trillion to the region's banks for three years at 1%, had boosted liquidity and reduced the interest rates on some of the under pressure countries sovereign bonds for a while, the fundamental problem remained.

"And every time you get a little bit of a change, like an uncertain election result in Greece, you're going to keep getting this volatility because the problem remains unsolved and the problem depends on a degree of political action which people get more or less certain is going to happen."

Three effects on CBA from the Eurozone problems

This troubled Eurozone backdrop had three effects on CBA, Narev added. Firstly, it meant the bank was keeping a close eye on its counter-party exposures with European financial institutions.

"That's something we've been looking at for a long period of time now. (And) we're very comfortable with our settings on that, that doesn't change dramatically with what's happening (now)," said Narev.

The second effect was on funding costs given the increased volatility and uncertainty in global financial markets usually meant prices rose in credit markets.

"The price goes up and in particular you see a steepening of the yield curve in terms of the providing of funding to banks. And when you're a bank like us, who says we need solid term funding not withstanding that by being safe you are incurring higher funding costs, that's just life."

And thirdly, although CBA was "very confident" about Australia's long-term economic prospects and believes the country's economy at the moment is "fundamentally pretty good,"  people's willingness to borrow, the likelihood they'll save and their lack of willingness to spend, gets exacerbated every time global uncertainties ramp up, Narev added.

"And we're in that environment again now and I expect you'll see some of that uncertainty flow through the Australian economy because of that."

JP Morgan's activities 'some distance from what we do'

Narev was also asked whether CBA was engaged in the type of activity that led to US investment bank JP Morgan Chase & Co disclosing at least US$2 billion worth of losses last week through a complex web of trades. Despite its losses, Narev said he still viewed JP Morgan as "an exceptionally strong and well run" institution.

"As you would expect when these things happen, and we were doing it over the weekend, my first call is to the (CBA) chief risk officer to say 'based on everything we know, have a look around and see what sorts of comparable things we do that could lead to that,' and we do not have any concern about that here."

"The sorts of specific things they did are quite some distance from what we do, apparently, I only know what I've read in the newspapers," Narev added.

Although CBA has counter-party positions with JP Morgan he said there were none related to "the events that have happened there," and nor had the estimated US$2 billion loss influenced CBA's view on the quality of its JP Morgan counter-party exposure.

"We're very comfortable with that."

'Banks not over regulated'

In the wake of the global financial crisis, and given the situation in Europe, Narev stressed that he would not join other bank executives in publicly criticising new banking regulations. His counterpart at the ANZ Banking Group, Mike Smith, has gone as far as urging banks from countries with strong banking systems like India, China, Australia and Canada to team up to fight against the Basel III global banking reforms.

"You haven't heard from here any comments about regulation not being appropriate, banks being over regulated etc," Narev said. "That hasn't come from here and won't come from here."

"We have a lot of discussions with APRA (the Australian Prudential Regulation Authority) about the specifics of their regulation and areas where we feel it might be a bit too tight etc. We have good dialogue with them. But my own view is that, given what we've gone through, regulators have a role to play and are playing that role."

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