GGeer­rm­maann lloossss ffr­roomm ‘‘GGr­re­exxi­itt’’ aatt

Financial Mirror (Cyprus) - - FRONT PAGE -

Hans-Werner Sinn, Pres­i­dent of the In­sti­tut think tank, has called for in­ter­na­tional debt con­fer­ence on Greece.

“Greece needs to get back on its feet eco­nom­i­cally and be­come com­pet­i­tive again. This calls for a de­val­u­a­tion of its cur­rency, thus a tem­po­rary euro exit, which, in turn, calls for a hair­cut. All of this must be jointly de­cided upon and in­ter­na­tion­ally co­or­di­nated”, said Sinn, cit­ing the coun­try’s mis­er­able eco­nomic sit­u­a­tion as jus­ti­fi­ca­tion for the pro­posal. “Un­em­ploy­ment in Greece is now twice as high as it was in May 2010. In­dus­trial pro­duc­tion has plunged by 30% com­pared to its pre-cri­sis level. The coun­try is sit­ting in a trap. In­ter­nal de­pre­ci­a­tion via aus­ter­ity pro­grammes has failed.”

Greece will never be in a po­si­tion to re­pay its debts in any case, and its gov­ern­ment is al­ready fac­ing the threat of another in­sol­vency, just like back in 2012, warned Sinn. In his view, it is there­fore bet­ter to try and break this vi­cious cir­cle. If Greece were to exit the euro, the Fed­eral Repub­lic of Ger­many would only stand to lose a max­i­mum of up to 76 bln euros at present. How­ever, even if Greece does not leave the euro, its losses will be almost equally as high, but will merely be ac­counted for in a dif­fer­ent way. And should Greece re­main in the Eu­ro­zone, there is ev­ery rea­son to be­lieve that the coun­try will need to is­sue new debt again and again and that this debt will also have to be waived in the long-term. For the com­mu­nity of states, long-term support for Greece will turn into a bot­tom­less pit, de­spite any im­me­di­ate hair­cut.

Ac­cord­ing to Sinn, there are his­tor­i­cal ex­am­ples of debt con­fer­ences that were suc­cess­ful. One of the con­di­tions for the Ifo an

If Greece de­clares in­sol­vency and is obliged to leave the Eurosys­tem, Ger­many will have to reckon with a loss of up to 76 bln euros, ac­cord­ing to Ifo In­sti­tut cal­cu­la­tions. If, on the other hand, Greece de­clares in­sol­vency and re­mains in the euro area, Ger­many stands to lose up to 77 bln euros.

Th­ese fig­ures in­clude the sums al­ready paid out by both of the bail-out pack­ages for Greece, pur­chases of Greek gov­ern­ment bonds by the cen­tral banks of the euro coun­tries, the Greek cen­tral bank’s Tar­get li­a­bil­i­ties, Greece’s li­a­bil­i­ties aris­ing from the more than pro­por­tion­ate is­sue of bank notes and the cen­tral bank’s claims against the Greek bank­ing sys­tem. The fig­ures do not in­clude the write-off losses sus­tained by Ger­man pri­vate in­vestors, and par­tic­u­larly those of Ger­man banks and in­surance com­pa­nies.

In the first fig­ures, the losses are cal­cu­lated in the case that Greece be­comes in­sol­vent and ex­its the euro. Should this hap­pen, the le­gal re­la­tion­ship of the Euro­pean Cen­tral Bank to the Greek bank­ing sys­tem would be ter­mi­nated, but the ECB’s Tar­get claims against Greece, as well as the claims aris­ing due to its dis­pro­por­tion­ate is­sue of bank notes would re­main. Ger­many would lose its share of th­ese ECB claims.

The sec­ond fig­ures re­late to the sce­nario whereby Greece be­comes in­sol­vent, but re­mains within the euro. The cal­cu­la­tion is slightly dif­fer­ent be­cause in this case the ECB sys­tem as a whole still holds claims against the Greek banks, as well as the emer­gency liq­uid­ity as­sis­tance (ELA) pro­gramme, claims against the Greek Cen­tral Bank, which over­lap with Tar­get claims.

If the pri­vate banks are also as­sumed to be in­sol­vent when a gov­ern­ment de­clares in­sol­vency, and the se­cu­ri­ties that th­ese banks have given their cen­tral bank are as­sumed to be mainly gov­ern­ment bonds or state-guar­an­teed bonds any­way, then Ger­many’s losses are even higher.

If no re­fi­nanc­ing credit is re­paid, losses re­lat­ing to the re­fi­nanc­ing credit in Greece (used to en­sure the coun­try’s liq­uid­ity) also need to be added to the to­tal. In this case, Ger­many’s share of the Tar­get credit losses needs to be re­placed in the cal­cu­la­tion by Ger­many’s share of all of the Greek cen­tral bank’s claims against Greek banks.

Since the lat­ter to­tal 46.4 bln euros and Ger­many’s share of this amount amounts to 26.5%, the 9.9 bln euros in Tar­get losses and the 1.1 bln euros from the is­sue of bank notes in the cal­cu­la­tion above are re­placed by 12.3 bln euros, which amounts to a to­tal loss of 77.1 bln euros, as shown in the last row of the ta­ble.

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