Monday, 16 February 2015

Greek exposure and resolution

How are Euro area countries exposed to a Greece default
EFSF guaranteed exposure to Greece Bilateral loans Max. Loss on ECB exposure In % of GDP
EUR bn EUR bn EUR bn#
Germany 41.3 14.2 55.5 2.0%
France 31.0 11.2 42.2 2.0%
Italy 27.3 9.7 37.0 2.4%
Spain 18.1 7.0 25.1 2.4%
Netherlands 8.7 3.2 11.9 1.8%
Belgium 5.3 2.0 7.3 1.9%
Austria 4.2 1.6 5.8 1.8%
Portugal * 1.4 1.4 0.8%
Finland 2.7 1.0 3.7 1.8%
Ireland * 0.9 0.9 0.5%
Slovakia 1.5 ** 1.5 2.0%
Slovenia 0.7 0.3 1.0 2.6%
Estonia 0.4 ** 0.4 2.1%
Luxembourg 0.4 0.2 0.6 1.2%
Cyprus * 0.1 0.1 0.8%
Malta 0.1 0.1 0.2 2.0%
Total 141.7 52.7 194.4 2.0%
* exempted as under bailout
** exempted by special arrangement
# share of losses suffered by the ECB
Source: UBS,IMF, Bloomberg February 2015

Malta stands to be hit by about 2% of GDP in case of a Greek default.   This is more than much richer Luxembourg, Netherlands, Belgium, Austria and Finland and much more than Cyprus, Ireland and Portugal who were exempted due to their being under balilout assistance themselves.

Now one can understand why it  is in our interest that a fair compromise is reached with Greece which however does not involve any haircut or write-down.

This can be done.  How?

Let us list the points that everybody seems to agree upon, or at least should agree upon, and around which some sort of compromise could possibly be built:
  • Greece needs to restructure their economy and make it competitive and sustainable not so much for the benefit of their creditors but mostly for their own sake. There is no future in playing the desperate role of bringing the roof on all if Greece is not allowed to continue living beyond their means.
  • Greece cannot sustain a debt of 175% of GDP and some sort debt easing is absolutely necessary as a quid pro quo for Greece doing what really needs to be done to restructure their economy.
  • Euro countries and Euro institutions that lent money to Greece cannot and should not take a loss on their loans to Greece.
This seems like squaring a circle but in fact it can be done with some flexibility and creativity and not only for Greece but for all countries for a portion of their debt which exceeds 100% of their GDP:
  • All direct bilateral loans and the bonds held by the ECB are to be refinanced at original cost by the ESM
  • ESM is to finance this by issuing zero coupon long term bonds which will be acquired by ECB through their QE operations. Better to focus QE on such measure rather than buy bonds of countries who do not need any Central Bank buying their bond ( e.g. Germany and Malta)
  • The refinanced bilateral loans to the extent that they reflect excess of debt to GDP over 100% are to be converted into long term contingent coupon bonds with coupon linked to GDP performance. Such contingent coupon bonds are to carry warrants that in case of non-respect of warranty conditions the bonds will become repayable on demand.
  • As further incentive, linkages are to be made where the higher the contingent coupon payable ( reflecting success in economic restructuring leading to economic growth) the more investment is to be allocated to Greece under the Juncker Plan and its successors or extensions.
  • Euro countries with strategic surplus in their Balance of Payments are to be compelled to pay non-refundable contributions to a contingency fund within the ESM to build a reserve against possible loan losses. This is in recognition that surplus members are gaining advantage through their Euro membership which they would not have gained if they had maintained their national currency.
There is space for a good and sustainable compromise after the parties get tired playing their dangerous games of chicken.

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