GGeerrmmaann lloossss ffrroomm ‘‘GGrreexxiitt’’ aatt

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.