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S&P and several others think a Greek default is manageable now
If Greece defaults, we – Ireland – stand to lose €1.7 billion, according to Standard and Poor’s.
And most of that loss falls on the Central Bank, the most profitable bank in the country, not the Government, which is only liable for €347m in bilateral loans.
Of course the Government’s own sums rely on the Central Bank paying back up the usual billion in dividend, rather than writing it off on a Greek default.
That, and the bilateral loan loss, would be enough to undermine the overarching budget objective of getting the deficit below 3% of GDP this year, such is the tight margin that the Government set in order to fund tax cuts and spending rises this year.
So we miss this year’s fiscal target by 0.5% of GDP – is that the end of the world? In the context of a full scale Greek default, it really would be getting away lightly.
Indeed according to S&P’s calculations, it is poor old Slovenia that would take the biggest hit as a percentage of GDP – 4% in their case, compared to 0.9% for us. The cost to the Germans would be 2.9%, 3% for France, 3.5% for Italy and 3.6% for Spain.
This compares with the amount of money European countries have put into their banking systems (no, we are not the only ones): net of recoveries, Belgium, Holland, Austria and Spain have spent between 3.5% and 4% of GDP on bailing out banks, while Britain and Germany have spent more than 8% of GDP on their bank rescues.
Of course we were sunk by the bank bailouts (gross cost – before recoveries – 40% of GDP), but because the banks tipped us into a programme, we were excused from having to go guarantor on EFSF loans to Greece, or make further bilateral loans. Which leaves us much less exposed now.
(For comparison, Finland’s government exposure is €4.2 billion).
Total losses – assuming zero recoveries – to the euro zone governments and the ECB/national central banks and the European Investment Bank are projected at some €300 billion, or 3% of Euro area GDP (excluding Greece).
But more than half of this money will only dribble out of government balance sheets over a 30 year period, as it is EFSF loans that are due for repayment in the decades beyond 2023. Which is why S&P and Bank of America and several others think a Greek default – even a Greek exit from the Euro Area – is manageable now.
Judging by yields, Government bond investors seem to think the same.
