Bank Group Chief: Greek Euro Exit Cost Could Pass $1.25 Trillion

With speculation mounting that Greece will ultimately either choose or be forced to leave the Eurozone and drop the euro, the head of a worldwide banking group whose members were forced to take 74 percent losses on their Greek investments said the cost could surpass unmanageable 1 trillion euros, or $1.25 trillion, it had originally estimated. Charles Dallara, Managing Director of the Washington-based Institute of International Finance (IIF) said the projection it made earlier this year, “it a bit dated now” and probably “on the low side.”
In February, the IIF estimated that Greece’s liabilities, in the event of a euro exit, could be crippling. “It is hard to see how they would not exceed 1 trillion euros,” the group said in an internal Feb. 18 report that hasn’t been made public. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again,” he said, according to the Bloomberg news service.
Dallara said that the European Central Bank’s (ECB) exposure to Greek liabilities is more than twice as big as its capital. He represented banks in their negotiations with the Greek government on its debt restructuring. He said given the disparate ratio that the ECB would be unable to provide liquidity and stabilize the euro-area financial sector. “The ECB will be insolvent” if Greece were to exit the euro, Dallara said. “Europe would have to first and foremost recapitalize its central bank.”
The ECB is part of the European Union-International Monetary Fund-ECB Troika that is putting up $325 billion in two bailouts to prop up the country’s essentially dead-economy. With the losses imposed on private investors by former Greek Finance Minister Evangelos Venizelos, the new leader of the PASOK Socialist party going into critical June 17 elections that could see Greece pushed out of the Eurozone if groups opposed to austerity measures that came with the bailouts prevail in the ballot, Greece is relying on public aid. The Troika has warned that any attempt by a new government to tinker with reforms, including pay cuts, tax hikes, slashed pensions and another $15 billion in cuts could lead to the loans being stopped, leave Greece unable to pay its bills, workers or pensioners.
EU President Herman Van Rompuy said that contingency planning for Greece leaving the euro “isn’t a priority,” while Morgan Stanley economist Elga Bartsch has said Greece has a 1-in-3 chance of a euro exit, according to Bloomberg. For Greece, in its fifth year of recession worsened by the austerity measures, it may be more effective to offer extra money to help its battered economy recover, Dallara said. Because Greece’s economy has shrunk so much faster than expected, it may need more time to meet its budget targets and repay its international loans, he added, although the cost of helping lift its shrinking economy could be at least another $12.5 billion.
“We’re talking about very modest sums compared to what’s already on the table,” he said. “A small olive branch here carefully defined, nuanced in its presentation, not as an alternative to fundamental reform but a recognition that some elements of this program were not that well designed, would be a wise thing and I would do it sooner rather than later,” Dallara said.
(Sources: Kathimerini, Bloomberg)