Global Losses From Greek Euro Zone Exit Could Reach ?1 Trillion

Greece’s potential exit from the euro zone – an event that seems more likely each passing hour – would incur enormous losses for foreign holders of Greek debt, none more so than European powerhouses France and Germany.

In the wake of failed coalition talks among the many political parties in Athens -- forcing new elections next month -- the financial markets appear to have already priced in Greece’s departure from the euro bloc – the euro has dropped against the dollar, European equities are sliding, and bond yields in Italy and Spain have been soaring.

All of this spells very bad news for foreign financial institutions who hold some €422 billion ($537 billion) of Greek debt.

The IESEG School of Management, a business school in Lille, France, has estimated that a Greek exit from the euro would lead to losses of €66.4 billion ($84.5 billion) for France and €89.8 billion ($114.3 billion) for Germany alone.

“Assuming that the new national [Greek] currency would depreciate by 50 percent against the euro, which is realistic, the losses for French banks would reach €19.8 billion [$25.2 billion]. They would reach €4.5 billion [$5.7 billion] for German banks,” IESEG said.

Eric Dor, head of research at the IESEG wrote: A default rarely results in total losses for creditors. The losses could be a fraction of this upper limit, but they would likely be several tens of billions of euros in any case.”

Meanwhile, on a global scale, the Institute of International Finance estimates the cost of Greece’s expulsion from the euro zone could reach as high as €1 trillion ($1.27 trillion).

In an opinion piece for the Daily Telegraph, Ambrose Evans-Pritchard commented that in the event of a Greek departure, “there would be massive global pressure on Europe to handle the exit in a grown-up fashion, with backstops in place to stabilize Greece. The IMF would [also] step in.”

He added: “The real danger is contagion to Portugal, Ireland, Spain, Italy, Belgium, France, and the deadly linkages between €15 trillion ($19 trillion) in public and private debt in these countries and the €27 trillion ($34.3 trillion) European banking nexus. This is where any further errors by EU leaders could take the world into full depression.”

European lenders are clearly concerned about an imminent Greek exit.

“What’s at stake isn’t just the next Greek government,” warned Guido Westerwelle, Germany’s foreign minister.

“What’s at stake is the Greek people’s commitment to Europe and the euro.”

Some top European officials, including IMF chief Christine Lagarde, are now publicly discussing the idea of a Greek exit – while cautioning that such step would be quite “messy.”

Karolos Papoulias, the president of Greece, who is forming an emergency caretaker government ahead of the next election, has pleaded: “We ask that our country remain in the euro without the catastrophic policy of austerity and we have the solidarity of Europe. I can’t guarantee that the euro area itself and the euro will be united and exist.”