Official Sector Losses In The Next Greek Re-Default

Includes: EU, EWI, EWP, EWQ, FGM, GREK
by: Russ Winter

A simple look at the participation percentages of various existing bailout funding schemes is in order. Taking one of the insolvents, Greece, Mark Grant calculates true debt to GDP at 422%, taking into account its contingent liabilities. Greece runs out of money (again) in September and faces a key August 20th debt rollover event. Given that 5-year Greek Treasuries yield 60%, one can conservatively assume the next Greek default haircut will be 60% or more.

The private sector has already received a severe haircut in the last inadequate restructure and has a little more blood to drain. The hit for this next one will fall squarely on the official sector. At that point, the loses will flow directly to the contributors of the rescue funds, and that would include Spain and Italy. The first chart below shows the exposure of the official sector in the Greek "rescue" programs.

Taking the IMF item of 22 billion euros lent to Greece, it's a simple matter of going to the IMF's website and looking at member quotas. Almost every country in the world contributes some amount, but the big players are the U.S. at 17.69%, Japan 6.56%, Germany 6.12%, the UK and France 4.51% a piece, and China 4%. Notable is Spain at 1.69%, and Italy at 3.31%. If we assume a fresh and very conservative Greek haircut of 50% of 11 bn euro, Italy and Spain will take a 550 million euro loss.

Of course, the IMF loss is small potatoes relative to the losses on the EFSF, bilateral loans and Target II liabilities. Bilateral and Target II liabilities are approximate to the EFSF "contribution keys." Here, we can total up all three schemes and arrive at 233 billion euros lent to Greece. In this instance, Germany's exposure is 29.07% and France's is 21.83%. Applying a 50% haircut to the Greek re-default, Germany's losses total 33.8 bn euros and France 25.4 bn. Italy and Spain's share of losses (assuming Germany and France don't pick it up) are 22.4 bn and 14.8 bn euros, respectively.

Unfortunately, that's not all. The ECB has 126 bn euros on the line with Greece. Germany's share of the ECB is 27.85%, and France has 21.83% exposure. In a 50% re-default haircut, Germany loses 17.5 bn euros and France 13.2 bn euros. Italy's loss is 11.6 bn, Spain loses 7.7 bn, even Portugal is sent the tab for 1.6 bn, and Ireland 1.0 bn. The total official sector bill for these schemes for already vulnerable Italy and Spain is 34.4 bn euros and 22.7 bn euros, respectively. So much for the theory of a free lunch with Germany footing the lion's share of the bailout.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.