As the
spectre looms ever larger of a Greek exit from the euro zone, economists have
been making highly complex calculations of how much that bombshell would cost -
with estimates as high as $1 trillion.
The
approximations vary widely with the one thing most analysts agree on being that
the cost of a Greek exit - or “Grexit” - is “incalculable” and depends how many
knock-on effects are taken into account.
The direct
costs, analysts at German lender DekaBank, relate to the hit other European
countries and the International Monetary Fund would have to take on their
holdings on Greek debt if Greece
were to default and leave the euro.
Via its
bailout fund, the European Financial Stability Facility, the EU has already
lent billions of euros to Athens.
At the same
time, the European Central Bank holds an estimated 50-55 billion Euros of Greek
paper, which would become effectively worthless.
In addition
to this is the so-called Target 2 interbank payments the Greek central bank
owes the European Central Bank, which economists at Swiss bank UBS put at 104
billion Euros.
UBS analysts
put the total direct costs of a “Grexit” at 225 billion Euros, DekaBank at 350
billion Euros, of which 86 billion Euros would be borne by Germany alone.
Douglas
McWilliams, however, from the Britain-based Centre for Economics and Business
Research this week put the figure at $1 trillion, around five percent of euro
zone GDP, if the break-up of the bloc is “unplanned”.
KNOCK-ON
EFFCETS
While the direct
costs are large enough, what really scares economists is the spillover effects
of a Greek departure, especially the “contagion” risks threatening other
fragile euro zone economies such as Italy
and Spain.
“The
mechanism that worries us the most would be the likelihood of bank runs in the
periphery,” said Stephane Deo from UBS.
“If Greece indeed leaves and the drachma loses half
of its value, or more, it would become obvious to depositors in other
parts of Europe that their deposits are at risk and we thus see a
bank run as a possible scenario,” he said.
In such a
situation, with the prospect of major social disorder, the ECB and governments
would have to step in, offering further billions to the bailouts already agreed
to Ireland, Greece and Portugal, economists say.
Hans-Werner
Sinn, president of the respected Ifo institute in Germany,
has spoken of the bill for Germany
alone being near one trillion Euros if the euro zone disintegrates in the wake
of a Greece
exit.
No wonder
that German Chancellor Angela Merkel and French President Francois Hollande
used their first news conference together to stress that they wanted to keep Greece in the
club, given the cost of the alternative.
The president
of the European Parliament, Martin Schulz, warned on Friday that the Greek
economy “would collapse within days” and require other European countries to
plough more billions into Athens
in emergency funds.
“You can
always lay out scenarios from the comfort of a research institute ... but the
political reality is a bit different,” Schulz told German radio while on a
visit to Athens.
But the idea
of Greece leaving the
eurozone, unmentionable only a few weeks ago, has slipped increasingly into
public discourse, with even ECB governing council members such as Belgium's Luc
Coene talking of an “amiable divorce”.
And some
senior figures even in Berlin have said Europe is in a better position to cope with the fall-out
after erecting a “firewall” of close to $1 trillion.
Former German
economy minister Rainer Bruederle, a close Merkel ally, told Handelsblatt
business daily: “Unlike two years ago, the eurozone today could cope with a
Greek exit.”
Charles
Dallara, who heads the Institute
of International Finance,
a grouping of leading banks around the globe, decided not to give a precise
figure when asked about the costs of a “Grexit”.
He said it would range from “somewhere between
catastrophic and Armageddon”Asad Khan
Financial Analyst (CFB)
050-8774861
asad@cfb.ae
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