IIF warns on €1tn cost of Greek euro exit

The cost of a Greek disorderly default and exit from the single currency could rise to €1tn, the body representing a substantial number of Athens’ private sector government bond holders, has warned.
The International Institute of Finance has said that the contingent liabilities – potential losses across the eurozone – of a disorderly default would probably be in excess of €1tn, in a confidential document to staff.
The IIF, which is representing global banks, asset managers and investors in negotiations over the €206bn debt swap of Greek bonds, said in the note: “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.”
But it warned the costs would spread across the entire eurozone, saying the contingent liabilities that could result in the event of a disorderly default would seem to include direct losses on Greek debt holdings of €73bn made up from both private and public sector creditors.
The European Central Bank would also face “sizeable losses” of €177bn, which the IIF said amounts to “over 200 per cent” of the ECB’s capital base.
The IIF went on to warn that the additional support needed for the governments and banks of both Portugal and Ireland to shelter them from fears of contagion could reach a combined €380bn over a five-year horizon.
The support needed to protect Spain and Italy from the same contagion fears could reach €350bn.
The ECB would be directly damaged by a Greek default, and would come under pressure to significantly expand its bond purchase programme to support sovereign debt markets. Bank recapitalisation costs, could easily be €160bn.
The document concluded: “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 €1tn.”

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