Sunday, 11 March 2012


For months now, The Blaze hasmeticulously covered events in Greece as they have
unfolded and, for anyone who has been paying attention, the situationdoes not look
 good. Indeed, many analysts believe that the eurozone crisis will only get worse.
But perhaps you still think it’s just a lot of “Chicken Little” nonsense and that a Greek default wouldn’t be that “that bad.” Well, perhaps this leaked memo from the Institute of International Finance (IIF), the organization representing private sector holders of Greek debt in official negotiations, will change your mind.
“[The memo] gives us the most detailed data we’ve seen so far about how the eurozone and the world would be affected by such a move,” writes Business Insider’s Simone Foxman. “It also explains just why EU leaders are doing everything in their power to prevent a disorderly default and Grexit [Greek exit] — the costs would be absolutely astronomical and the fallout uncertain.”
Indeed, judging by the language used in the leaked memo, eurozone leaders are far more afraid of a Greek default than they have been willing to admit.
“And while investors may think that these costs are ‘priced in,’” Foxman notes, “a Greek hard default really might just be another Lehman.”
Which is to say, “disastrous.”
Here are some of the most frightening implications from the IIF’s confidential report (via Athens News and Business Insider):
1. “First, Greece would fail to honor payments on its €368 billion ($486 billion) in debt obligations,” Foxman writes, “That would probably collapse its banking system.”
Indeed, according to the IIF, that would immediately threaten:
  • €91 billion in Greek banks’ obligations to foreign lenders and depositors, €28 billion of which are in the eurozone
  • €247 billion Greek households and companies owe to Greek banks. 15 percent of these loans are already nonperforming.
  • €21 billion that Greek corporations owe to foreign lenders
2. €73 billion of Greece’s debts are held by eurozone countries and the IMF, which means if the small Mediterranean country can’t make its payments . . .
“Additionally, the IIF estimates that the official sector — either governments or bailout funds — would easily have to provide €160 billion ($211 billion) to make sure banks don’t go under, or else force higher capital-to-liabilities ratios through sharper deleveraging,” Foxman writes.
3. The European Central Bank (ECB) could be irreparably damaged. According to IIF estimates, the ECB has as much as €177 billion ($234 billion) tied up in Greece:
  • €43 billion in Greek government bonds purchased as part of the Securities Markets Program
  • €110 billion in Greek government bonds and other securities that domestic banks used as collateral to borrow from the ECB
  • €24 billion in loans to Greek banks through the emergency liquidity assistance program (ELA)
4. Given all the above, there is probably no way that Greece will be able to stay on the euro – or in the eurozone for that matter (via Athens news [emphasis added]):
“Given these financial traumas, it is difficult to conceive that Greece can remain a functioning member of the Euro Area in the event of a disorderly default. The Greek authorities would have little option but to regain monetary policy independence by exiting from the Euro Area and introducing a new national currency…
The issue of whether Greece can remain in the European Union after defaulting and leaving the Euro Area is not clear-cut. The likely imposition of capital controls and possible inability to honor other EU laws and directives would raise important questions.”
5. Perhaps the biggest threat is that, as many analysts have been saying for months, the Greece contagion will spread [author’s note: can we call it a Greece Fire? Has anyone done that yet? If not, we claim it]. In fact the IIF believes the fears about the possibility of a Greek contagion are actually understated:
Financial linkages are potentially more powerful, especially since market developments since the onset of the crisis in 2007 have highlighted a propensity for “runs” to occur on a scale and at a pace that had previously been unimagined. Many policy makers incorrectly believed that the fallout from a Lehman bankruptcy would be contained, since markets had been apparently pricing in a significant default risk well ahead of the actual event.

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