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The Greek debt: what creditors may stand to lose

Financial exposure to the risk of Greece defaulting on its €320bn debt affects eurozone member states and foreign banks. How will it all play out?

Alberto Nardelli and Silvia Merler

Friday 19 June 2015 07.00 BST,the guardian

Greece says it will run out of money at the end of the month if a deal with its creditors the European commission, the European Central Bank and the International Monetary Fund cannot be reached.

The lack of an agreement before the IMF payment deadline of 30 June will not mean an automatic exit from the eurozone. If Greece were to default on the IMF and then also leave the currency union, pinning down the precise losses to creditors will not be a straightforward task.

Any calculation will need to not only consider the size of the Greek debt (roughly €320bn, which translates into 175% of its GDP) but also take into account possible contagion – a market panic spreading to other countries – and the amount Greece chooses to not pay.

Data detailing the world’s financial exposure to Greece give an indication of how a total breakdown between Greece and its creditors might play out.

At the end of 2014 the three main creditors held more than 75% of Greece’s total debt, most of which lay in the hands of eurozone governments. These countries are directly exposed to the risk of Greece defaulting, through bilateral loans and the money they have put into the EFSF (the European Financial Stability Facility), which has dispersed loans to Greece.

The exposure from the bilateral loans and the EFSF alone amounts to €195bn, or 61.5% of the outstanding Greek debt.

But eurozone countries are also exposed indirectly due to interventions in the sovereign debt market such as the ECB-operated Securities Markets Programme, for which Greece still owes €28bn.

Those countries are also potentially exposed to Greek banks, which have borrowed more than €80bn under the ECB’s Emergency Liquidity Assistance (ELA) programme to counter capital flight. It is especially unclear how much individual states would lose under ECB-operated programmes if Greece were to default.

The sum of all this debt exposure, according to Barclays Research, amounts to 3.3% of the eurozone’s GDP.

The eurozone’s largest economies, Germany and France, are nominally the most exposed. However, relative to the size of each nation’s economy, the hit would be greater on some of the area’s smaller members, such as Slovenia and Malta, and on Spain and Italy, whose economies are still fragile. In Spain and Italy political dissatisfaction is elevated as clearly shown by the recent local elections in both countries.
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But it is not only the government in Greece to which foreign investors are exposed. And though they would be the ones absorbing most of the losses, the three official creditors are not alone in the list of those who could potentially be hurt by a Greek default. There is also the private sector, led by the banks.

After Greece came under market pressure and entered a bailout programme in 2010, foreign banks started to rapidly reduce their exposure to Greece.

Euro area banks’ exposure to Greece, which had peaked at about €128bn in 2008, dropped to €12bn in September 2013. UK banks’ exposure was €13bn in March 2008, and dropped to €4.3bn by December 2012. US banks’ exposure, which was about €14bn in September 2009, was down to €2.5bn at the end of 2012.

However, data from the Bank of International Settlements (BIS) reveals that the potential exposure of both US and UK banks has recently been increasing again.

As of December 2014, US banks’ total consolidated claims towards Greece tallied at €10.2bn, while the UK has €9.7bn tied up in the country.

Even eurozone banks have been increasing their exposure compared to the low points of 2012. German banks’ claims on Greece, which dropped to €3.9bn at the end of 2012 after having peaked at above €30bn just two years earlier, were back to €10.6bn at the end of last year. Although at a reduced scale, Dutch and Italian banks have also seen their exposure increase over the same time period. The aggregate claims of French banks remain relatively low, compared with an exposure that was higher than €50bn five years ago.

The composition of banks’ exposure varies across countries and has changed significantly over time. In 2012, for example, exposure to the Greek private non-financial sectors accounted for the largest share of banks’ exposure to the country.

Exposure to Greek banks has increased both in nominal terms and as a share of total claims, according to analysis by thinktank Bruegel. Most of the US (€9.5bn) and UK (€6.7bn) current exposure is in fact to the banks.

If Greece were to leave the eurozone, it is unclear what the process would be to recoup this money.

In addition to all this there is the IMF. It holds about 10% of Greek debt. Although Greece is one of the fund’s biggest borrowers, the exposure is relatively modest within the context of its resources - and more importantly, as the most senior creditor, it would be the first to be paid back.

Support the IMF provides is based on members’ quotas. According to OpenEurope calculations, the UK has provided £1.72bn to the IMF’s share of Greece’s bailout package.

These of course are just the numbers. The cost of Greece exiting the euro goes beyond the currency union’s 3.5% of GDP. The danger of other risks – the price for Greek society, possible repercussions beyond Greece’s borders, economic and political contagion, and the consequence of debunking the basic principle that the euro is irreversible – is far more difficult to predict.