A Grexit could cost the European Central Bank tens of billions of credit, a hole that Germany and other euro zone members may have to fill, says a Reuters report.
The continuous arguing between Greece and lenders has put a temporary stop to loans from euro zone countries, so Greece has resorted to drawing heavily from the ECB, running up an ever larger tab.
Alexis Tsipras’ government insists Greece will remain in the euro zone, but negotiations with creditors have stalled. This has “prompted the ECB to examine the impact of a possible Grexit, uncovering a big potential bill for the central bank and the euro zone countries that underpin it,” says the Reuters report.
Such losses would be in addition to a default on some or all of Greece’s 320-billion-euro national debt and is another reason why the rest of Europe will try to keep Greece in the common currency bloc.
“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?” Zenios added.
ECB President Mario Draghi recently tallied finance to Greece at 104 billion euros. Roughly 38 billion of that was an emergency loan to Greek banks, and the amount of borrowing from the central bank is rising.
“In case of a default, there would likely be a hit from the ‘overdraft’ that Greece is running in the euro zone ‘Target 2’ payments system,” the report says.
“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 U.S. bank Citi.
The potential damage is rising as Greece’s financial system becomes ever more dependent on ECB cash.
Hans-Werner Sinn, head of Germany’s Ifo Institute told Reuters, “If Greece leaves the euro and defaults, Germany’s maximum loss from foregone Target claims would be 24 billion euros. 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,” Sinn added.
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