Who would pay the bill, if Greece defaulted on its current €320bn debt ($340bn)?
This is no longer just a theoretical question. Of course, we have all known since 2012 that Greece would never be able to repay its debt. But the EU covered up this hard truth by a ‘pretend and extend’ policy:
- The default deal deferred repayment over many years, in some cases out to 2050
- Interest payments were also reduced and deferred in some cases for up to 10 years
- But not all the repayments have been postponed: €20bn is due to the IMF, EU and ECB over the next 6 months
- Yesterday, the Greek government suggested it might not be able to repay $1bn due next month
The 2012 deal also involved one very critical element. The debt had been lent by German and other banks, who clearly couldn’t afford to ‘pretend and extend’ the loans. So governments, led by the European Central Bank, repaid these loans and effectively took responsibility for Greece’s debt.
Thus around 75% of Greece’s debt is now owed to governments – only €34bn is now owed to private lenders. This, of course, is the reason why Greece’s unemployment rate is still at 25% – very little ‘new money’ has actually gone into support for the Greek economy itself.
In turn, this is why the left-wing Syriza government won power in January. No country is going to put up with 50% of its young people being unemployed forever. And Syriza’s stance on the debt issue is also far more aggressive, tabling a €279bn reparations bill to Germany for a forced loan taken during World War 2.
So now the question arises – what would happen if Greece and the Troika (IMF, ECB, EU) fail to agree on another ‘pretend and extend’ default deal? The answer seems clear – the ECB countries would have to pick up the bill.
This is where the chart above begins to matter, as it shows the ownership of the ECB itself, based on official ECB data. Germany has the largest share at 18%, and so it would face the biggest bill, which could reach €86bn on some calculations, given related losses which would likely occur in the ECB’s Target 2 payments system.
This figure has not been mentioned to the German electorate. Nor have they been told that the bill might well be higher if countries such as Italy (12%) and Spain (9%) decided they couldn’t afford to pay their share. This seems highly likely, given the poor financial state of both economies.
And this is not just my view. Germany’s highly respected Ifo Institute analyses the risk as follows:
“If Greece leaves the euro and defaults, Germany’s maximum loss from foregone Target claims would be €24bn. Germany’s maximum loss in the case of a Greek exit would amount to 86.2 billion euros. Should all crisis countries (Greece, Ireland, Portugal, Spain, Italy and Cyprus) default and exit the euro, Germany’s … overall loss from all rescue operations would amount to €322bn.”
A bill for €322bn, or even €86bn, would create a political firestorm in Germany. Electorates in other northern EU states would also be shocked by what had been done in their name. It would also probably create a major political crisis in non-Eurozone members such as the UK, which owns 14% of the ECB’s capital.
Of course, the EU may still come up with another version of the ‘pretend and extend’ policy. Experienced observers such as Commerzbank suggest there is at least a 50% chance of this happening.
But positions are clearly hardening on both sides. In turn, the fault lines around the global debt-fuelled ‘Ring of Fire’ could well widen still further, if reality overtakes the ‘pretend and extend’ policy.