Greek public debt is denominated in euros, so the euro face value of the debt would not change if Greece leaves.
Since public sector lending virtually replaced debts held by the private sector in Greece, this time around a default will target the European taxpayer.
Some European officials argue privately that the euro could cope with a Greek exit because markets understand that Greece’s debt crisis is uniquely severe.
UBS enumerates the kind of losses he will see in a recent note:
The math is simple.
Europeans have lent in various forms to Greece: via bilateral loans, and via EFSF more recently but also via the ECB’s SMP.
ATHENSTwo years after Europe bailed Greece out to protect the euro, the rescue has become a debacle that threatens to unravel the common currency.
The OECD warned the euro area’s debt crisis could pull the bloc’s economy into a vicious downward spiral, as it slashed its forecasts for growth.
A 50% haircut on this debt would thus mean a €91.0Bn loss for the European taxpayer, or 0.7% of Euro Area GDP.
The perception was that there was a risk of a disruptive sequence of events which could have triggered a severe credit crunch in the euro area.
Bailouts for Spain and Italy might be required, dwarfing the cost of keeping Greece in the euro zone fold and possibly fracturing the currency area.
This means that, in order to reduce the ratio by one third, our original target to make the trajectory “sustainable”, the haircut needed is now two thirds.
Hence the estimated cost for the European taxpayer of a one third haircut is no longer €60.6Bn, but potentially €121.3Bn.
The cost for the European taxpayer in case of a 50% haircut is no longer €91.0Bn, but €136.4Bn.
N our view we have to assume that the recovery rate would be zero on Target 2, either because it will not be repaid, or because if it is repaid in part, it would be in hard currencies that would not be available for public debt repayment.
We thus need to add €104Bn to the number above mentioned, the total cost for the European taxpayer of a Greek exit would then be €225.3Bn in the case of a one third haircut (1.8% of the Euro Area GDP), €240.4Bn in the case of a 50% haircut (1.9% of the Euro Area GDP).
Why, after two arduous years of negotiations, austerity and halting progress, would the euro zone risk the chaos created by a Greek exit if the government doesn’t follow the bailout program as promised.
For those who suggest that the euro is about to fall apart this is a reminder from the leaders of the euro area of what the euro project is all about: bridging the euro area economies and building bridges between the people of Europe.
Alan Whitehead is a business journalist based in Los Angeles, California. Alan has a passion for financial markets and breaking news stories and loves writing about business news, stock market, and economic opinions that matters most to its audience. Alan spends a lot of time discovering and researching latest financial markets and industry news stories in order to make sure the latest and greatest stories are brought to you first on BigBoardNews.com.