A messy Greek default could cost the Eurozone over 1 trillion Euros to prevent the threat of contagion in other poorly performing Eurozone countries. A document compiled by the Institute of International Finance (IIF) marked as “IIF Staff Note: Confidential” has been obtained by Reuters. The secret report that was dated February 18th suggests that both Ireland and Portugal would need 380 billion Euros as a buffer against any exposure to Greece. Spain and Italy would also require “substantial support,” in the region of 350 billion Euros “to stem contagion.”
The report admitted the gargantuan sum may not be completely accurate but suggested the cost would more likely exceed 1 trillion Euros than undershoot it: “It is difficult to add all these contingent liabilities up with any degree of precision, although it is hard to see how they would not exceed 1 trillion Euros.”
The European Central Bank is estimated to have a 177 billion Euro exposure to Greece, which would present a 200% capital base loss. A further 160 billion Euros would, according to the leaked document, be needed in massive overhauls to recapitalise Eurozone banks.
To avoid a messy Greek default, the sovereign nation and ECB must persuade private bondholders to take part in a debt swap deal that would see them lose 70% of the real value of their assets (50% nominal value). The organization representing German investors announced a call to arms yesterday for credit holders NOT to take part in the debt swap deal because they felt there was a chance they could be paid in full or receive Credit Default Swap (CDS) payments.
Greek Finance Minister Evangelos Venizelos has rebutted the German investors’ claims and urged bondholders to accept the deal: “Whoever thinks that they will hold out and be paid in full, is mistaken. We are ready to activate CACs if needed.” CACs are Collective Action Clauses that would be used to enforce losses upon Greek carriers of debt.
Venizelos has confidently stated that Greece are aiming for “near universal participation” this morning which leaves the remaining bondholders in a difficult situation. If 90% or more cooperate, the remaining investors will be reimbursed fully, but if less than 90% participate the remaining parties will be penalised by the activation of Collective Action Clauses incurring further loss.
The Pound to Euro Exchange Rate has rallied back towards the 1.20 mark this morning following the announcement that declining exports have caused the Eurozone economy to decline by -0.3%. Q4 Gross Domestic Product for the Eurozone followed analysts’ expectations and shrunk by -0.3%, prompting investors to buy Sterling and bump the Pound to Euro Exchange Rate to 1.2000 (10:28 GMT). The Euro has also lost ground against the US Dollar, with the Euro to US Dollar Exchange Rate currently standing at 1.314 (10:29 GMT).