Who loses what if Greece defaults and exits the euro? Here is a table that I copied from Mish, who got it from Barclay's. These are estimated exposures, not losses. Losses could be well in excess of 50% of the exposures. They even could be close to 100% for those exposures that are not collateralized.
The astonishing thing to me is the estimated exposure of Target 2, which is the clearing system through which payments between countries in the eurozone are cleared. If I understand the estimate, it means that the Greek Central Bank owes the other central banks, including the ECB, $130 billion euros, a number that dwarfs all the other numbers in the table. Such a sum would have to have been built up over a fairly long period of time. It seems to suggest that the Central Bank of Greece has lent similar sums to Greek banks that could not otherwise clear their outflow transactions. In theory, such loans by the Central Bank of Greece to its member banks should be collateralized, but whether such collateral would have value is not known. It also is not known how the Central Bank of Greece would treat its obligations to the ECB and other eurozone central banks in the event of a Greek default and exit from the euro.
The 35 billion of SMP exposure refers to the securities purchased by the ECB in the open market. Losses on such securities would fall similarly to the Target 2 losses. In this case, there is no collateralization.
The table appears to assume that whatever loss from Target 2 would fall on the ECB and that it would have to be made up by the remaining countries in the euro. I wonder whether that would be the case. I am guessing that the ECB will do something other than calling on the member states or their central banks to make up for the loss. After all, in theory, the ECB could simply cause more euros to come into being or could operate with a lesser theoretical capital base. It is not merely a bank.
Some of the other exposures are exposures to having to write off money that already has been lent. This would be true of the bilateral loans, for example. Since nations do not, strictly speaking, have balance sheets, such write-offs would merely disappear. They would show up in the GDP numbers, I assume, but not being cash, those losses should have no real impact.
To the extent that nations have issued guarantees of debts or have pledged to provide money to a common fund, those would be real losses that each nation would have to make up by providing cash. The big number here is the EFSF (European Financial Stabilization Fund) exposure of 73 billion. The EFSF has borrowed these funds in the capital markets on the strength of its member nations' guarantees. (See Investor presentation May 15, 2012 on the linked EFSF website.) Thus, if Greece were to default, the member nations would have to make up for the losses. That 73 billion euros is, therefore, a real exposure that, it appears, cannot be fudged away. Such is the power of leverage.
Those are the exposures of official (public) entities. I do not have a handle on the private exposures at this time.
How bad would a Greek default be for the other eurozone countries? From this brief survey, that appears to depend on the creativity of the ECB. I expect that the ECB would be creative.
In order to evaluate the real impact, one needs to understand the private sector risks as well as the public sector risks.
Regardless of whether the private sector risks also appear bearable, the big question will be contagion.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
