Opinion / 14 July 2015, 07:45am / Leonid Bershidsky
Keeping Greece within the euro zone and the EU is a political question. Yet it’s also about money, and it may be worthwhile to consider how Europe would act if it were a bank confronted with a big delinquent debtor.
This would be an easy question to answer if the choice were merely between a Greek default on all of its debt and a write-off of some portion. Something is better than nothing. Yet the situation is more complicated: Greece wants e53.5 billion (R738bn) over the next three years. Would a banker lend that sum to retain a chance of hanging on to some of the money already invested?
Calculating how much European countries would lose if Greece were cut off is not straightforward.They are seriously exposed to Greece in four ways: through straight bilateral loans issued as part of the first bailout in 2010, through guarantees on loans issued by the European Financial Stability Facility (EFSF) and the EU bailout fund, through the European Central Bank’s (ECB) holdings of Greek bonds and through Target2, the ECB’s settlement system in which all euro members have outstanding claims on Greece.
It’s doubtful that the Target2 claims, a total of e100.3bn, should even be part of the equation. Four non-euro countries, Bulgaria, Denmark, Poland and Romania, are part of the system, and even if it drops the currency, Greece will still do a lot of trading in euros. Besides, part of that exposure is collateralised. A banker would only worry about the rest of the debts, e211bn at face value.
A Greek default on the bilateral loans would mean a straight loss to the creditor nations, but it would fall under the classic definition of sunk cost: The countries wouldn’t have to plug a hole in any balance sheet by borrowing more, they’d just never get back their e52.9bn. That would be painful, but the payments are spread over 22 years, starting in 2020, and the interest rate is just 50 basis points more than the three-month Euribor rate, which is in negative territory right now.
The loans are basically interest-free. At a 2 percent discount rate, the present value of the repayments would be about e40bn.
The EFSF loans also are practically interest-free, with repayments spread over 32 years, starting in 2023. The fund would probably call in its members’ guarantees if Greece defaulted – though that wouldn’t happen until the first payments were due. Most countries would need to issue new debt to cover the guarantees, a whopping e130.9bn exposure, but in present value terms, it amounts to less than e100bn. Besides, the guarantees are already accounted for in the European countries’ debt levels.
The only payments Europeans should worry about now are the ones due on bonds owned by the ECB. The total amount Greece owes is e27.2bn, with e4.4bn due in July and August, and most of the rest scheduled to be repaid in 2017 and 2019.
If Greece defaults, however, the ECB probably won’t even need to make any capital calls on euro countries’ central banks. RBC Capital Markets said recently the ECB’s own loss absorption capacity was e36.3bn at the end of last year, and the euro system’s is at about e500bn now, dwarfing the Greek debt.
In total, the potential losses from a massive Greek default appear to outweigh the pain of investing another e53.5bn over the next three years. Not counting the ECB and Target2 exposures, Europe would be looking at a present-value loss of e140bn. If it behaved like a bank, Europe would be tempted to lend more money to help Greece get back on its feet and repay the huge debt.
The problem, however, is that Greece also wants debt restructuring, ideally a write-off, and it has plenty of backers, including the International Monetary Fund, which considers the current burden unsustainable.
It’s anybody’s guess how the forgiveness might be structured, but if half of the existing debt’s present value is snipped off, the decision for EU-as-bank becomes trickier.