IIF Staff Note: Confidential February 18, 2012 Implications of a Disorderly Greek Default and Euro Exit im Netz

 IIF Staff Note: Confidential February 18, 2012
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Implications of a Disorderly Greek Default and Euro Exit
Summary
There are some very important and damaging ramifications that would result from a
disorderly default on Greek government debt. Most directly, it would impose significant
further damage on an already beleaguered Greek economy, raising serious social costs.
The most obvious immediate spillover it that it would put a major question mark against
the quality of a sizeable amount of Greek private sector liabilities.
For the official sector in the rest of the Euro Area, however, the contingent liabilities that
could result would seem to be:
o Direct losses on Greek debt holdings (€73 billion) that would probably result from
a generalized default on Greek debt (owed to both private and public sector
creditors);
o Sizeable potential losses by the ECB: we estimate that ECB exposure to Greece
(€177 billion) is over 200% of the ECB’s capital base;
o The likely need to provide substantial additional support to both Portugal and
Ireland (government and well as banks) to convince market participants that these
countries were indeed fully insulated from Greece (possibly a combined €380
billion over a 5 year horizon);
o The likely need to provide substantial support to Spain and Italy to stem
contagion there (possibly another €350 billion of combined support from the
EFSF/ESM and IMF);
o The ECB would be directly damaged by a Greek default, but would come under
pressure to significantly expand its SMP (currently €219 billion) to support
sovereign debt markets;
o There would be sizeable bank recapitalization costs, which could easily be €160
billion. Private investors would be very leery to provide additional equity, thus
leaving governments with the choice of either funding the equity themselves, or
seeing banks achieve improved ratios through even sharper deleveraging;
o There would be lost tax revenues from weaker Euro Area growth and higher
interest payments from higher debt levels implied in providing additional lending;
o There would be lower tax revenues resulting from lower global growth. The
global growth implications of a disorderly default are, ex ante, hard to quantify.
Lehman Brothers was far smaller than Greece and its demise was supposedly well
anticipated. It is very hard to be confident about how producers and consumers in
the Euro Area and beyond will respond when such an extreme event as a
disorderly sovereign default occurs.
It is difficult to add all these contingent liabilities up with any degree of precision,
although it is hard to see how they would not exceed €1 trillion.

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