With growing fears that Greece could be forced out of the Eurozone if voters on June 17 elect parties opposed to the bailout deals from international lenders who required austerity measures in return, a powerful incentive has developed to keep the country in the economic bloc. The losses from a Greek default who would be so heavy that it could weaken, or bring down, the European Central Bank, which, with the European Union and International Monetary Fund, makes up the EU-IMF-ECB Troika putting up $325 billion in two rescue loan packages.
Greece earlier forced losses of 74 percent on private investors and is dependent on the Troika’s money to pay workers, pensioners, bills and other government expenses. With anti-austerity parties warning that if they win, they will try to renegotiate the terms or renege on the payments, the Troika has warned that such an outcome could lead to a cut-off of the loans keeping Greece alive. But if Greece walks away from its payments, the bill could be put in the hands of the IMF, ECB, and the citizens of the other 16 countries who also use the euro as a currency. Greece would have to return to a deeply-devalued drachma and possible chaos and anarchy, but it would be left to its investors to pass the tab on to others or take deep hits, according to a Reuters report.
“In the event of an exit, they (Greece) will default. And the loss given default will probably be very high, high enough to eliminate the ECB’s capital,”Andrew Bosomworth, senior portfolio manager at asset manager Pimco told the wire service. “They might need recapitalization from governments, who are not exactly in the best position to provide additional capital.”
Those are not the only losses the ECB and its national shareholders might face as is explained in detail below. If Greece leaves the Eurozone, the costs to other countries – including Germany, the biggest contributor to the loans and the EU’s biggest economy – would continue to mount as it would probably be compelled to avert a complete Greek collapse and wider contagion.
“Large-scale ECB intervention would be necessary to stabilize the system, along with intervention from Germany, the European Stability Mechanism (ESM), its predecessor the European Financial Stability Facility (EFSF) and the IMF, potentially costing hundreds of billions of euros,” Georgios Tsapouris, investment strategist at Coutts, told Reuters.
The ECB has about $8.06 billion in capital and is essentially a joint venture between the 17 Eurozone national central banks (NCBs.) Combined, they have capital reserves of only $108.3 billion. The national central banks would divide up any losses between them according to the ‘capital key’ – the ECB’s measure of countries’ stakes in its financing based on economic size and population. Germany would bear the biggest loss, some 27 percent of the total, and France would take a big hit as well.
A Greek exit from the euro zone could cost the French taxpayers up to $83.6 billion and leave the country’s banking system with $25.18 billion in lost loans, according to a study by the IESEG School of Management in Lille. Smaller countries with less robust national central banks than the German Bundesbank would likely be still harder hit in relative terms. “The ECB and some of the NCBs with little loss-absorbing capital and reserves relative to their share of how a loss would be allocated across the Eurosystem would potentially see their capital and revaluation reserves written off,” Bosomworth said. It appears some EU politicians still want to let Greece go if the anti-austerity parties are elected. “It’s going to hurt, absolutely. But is it going to be lethal?” one EU diplomat said. “We have two bad choices, but one is worse than the other.”
Under a scenario described in German weekly Der Spiegel, the Eurozone’s EFSF bailout fund could be used in the event of a Greek default to continue funding Greece’s debt obligations to the ECB, but this would erode the firewall’s ability to help other struggling Eurozone economies, such as Portugal, Spain and Italy, and there is worry that a Greek exit could lead to those countries leaving as well.
ECB President Mario Draghi said that “Our strong preference is that Greece will continue to stay in the Eurozone.” New York University Professor Nouriel Roubini, known as “Dr. Doom,” for his constantly pessimistic assessments, said Greece will probably become insolvent and leave the euro this year or next, as Handelszeitung reported. “An orderly exit of Greece from the euro is linked to considerable economic pain,” Roubini wrote in the Swiss newspaper Handelszeitung. “But to watch the slow and disorderly collapse of the Greek economy and society would be much worse.” Roubini said “other periphery countries already have problems” similar to Greece’s in terms of their debt burden and lack of competitiveness. Portugal “will probably have to restructure its debt at some point and leave the euro. Illiquid but potentially solvent economies like Italy and Spain will need the support of Europe, whether Greece exits or not,” he wrote.
(Sources: Reuters, Kathimerini)
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