FRANKFURT – A Greek departure from the euro could expose the European Central Bank to losses on tens of billions of credit, a hole Germany and other euro members may have to fill.
As political wrangling with Athens freezes the country’s access to loans from eurozone states, Greece has been drawing heavily on the ECB, running up an ever larger tab.
The Greek government insists it will remain a eurozone member but the uncertainty has prompted the ECB to examine the impact of a possible ‘Grexit,’ people familiar with the matter said, uncovering a big potential bill for the central bank and the euro zone countries that underpin it.
Any such losses would come on top of a default on some or all of Greece’s more than 320 billion euro (236 billion pounds) national debt and provide another reason for keeping Athens inside the fold.
The ECB bill could bounce to euro zone countries because the central bank is a joint venture they own.
“If one is pushed out, the rest have to absorb the costs,” said Stavros Zenios, an academic and member of the Board of Directors of Cyprus’s central bank.
“You leave those who are left behind with a bigger and bigger burden. The loss will be absorbed by member states like Italy and Spain. Are they in a position to absorb this loss?”
The ECB declined to comment on any potential liabilities it could face.
In the red
The full extent of risk for the ECB is complex because disentangling support for Greece would raise a host of legal questions that could take years to answer.
Some of the different liabilities overlap. Neither is it clear how much of the bill would go unpaid. But the risks can be identified.
ECB President Mario Draghi recently tallied finance to Greece at 104 billion euros ($112 billion).
This amount, including roughly 38 billion euros that Greek banks borrowed from the ECB and emergency funding from the national central bank, is rising.
But it belies the full extent of ECB support. In case of a default, there would likely be a hit from the ‘overdraft’ that Greece is running in the euro zone payments system.
Under the ‘Target2’ system, when a bank in Greece transfers money to Germany to pay, for instance, for an imported machine, it registers this liability with the ECB to reflect the money movement.
Germany’s Bundesbank gets a credit via the ECB, while Greece’s central bank edges into the red. Greece is a big net importer and has also been suffering from capital flight.
This shortfall is virtual as long as the euro zone is intact but were a country to tumble out, a loss could crystallise.
The remaining euro countries may either have to make it good or write it off. By this measure, Greece is now 91 billion euros in the red, according to the central bank of Greece. In the worst case, euro central banks would have to turn to governments for fresh capital to fill the hole.
“Just leaving the euro zone would not extinguish Greece’s liabilities. The rest of the Eurosystem would be responsible for the Greek central bank’s liabilities,” said Willem Buiter, chief economist of US bank Citi.
“The rest of the Eurosystem would have to write off most of its claims on the Greek central bank,” he said. “You can’t get blood out of a stone.”
The ECB also owns roughly 18 billion euros of Greek bonds, which would probably be worth a fraction of their face value should the country leave the eurozone.
A further roughly 40 billion euros of bank notes, much of which is tucked under ‘bed mattresses’ around the country, represents another liability, said three people with knowledge of the matter.
Bank notes are a claim that the wider Eurosystem of central banks would be obliged to honor, they said.
The potential cost is rising as Greece’s financial system becomes ever more reliant on central bank cash.
Since November last year, the total deposit base has shrivelled by 25 billion euros to roughly 152 billion euros – its lowest level in a decade and about 100 billion euros below its peak in 2009.
Hans-Werner Sinn, head of Germany’s Ifo Institute, has long warned of the dangers for the euro zone’s economic engine.
“If Greece leaves the euro and defaults, Germany’s maximum loss from foregone Target claims would be 24 billion euros,” he told Reuters by email. “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 322 billion euros.”
The ECB has a line defence, starting with paid up capital of some 7.7 billion euros.
The wider Eurosystem network of central banks has capital and reserves of 95.5 billion euros. In addition, there are provisions against losses and reserves of notional profits on holdings such as currencies that have yet to used.
To avoid eating into this, eurozone hardliners have argued for capital controls should the outflow from Athens worsen.
While contested, it may prove a lesser evil than seeing Greece spin out of the eurozone’s orbit, something Citi’s Buiter described as “a catastrophe of the first order.”