Will market turbulence begin again if Greece bows out of the EU? Professor Eric Dor takes a look at potential exposure

Just one week ago, the European Court of Justice (ECJ) passed a ruling that the a proposed program by the European Central Bank could be deemed permissible under European Union law, removing a potential obstacle to the launch of a euro area quantitative easing scheme.

The Outright Monetary Transactions (OMT) programme, the focus of an ECJ adviser’s statement, was deemed to be an “unconventional monetary policy measure”, but one that was “necessary” and “in principle legitimate”.

This served to bring concerns that should Greece exit the European Union, the European Central Bank could be exposed to vast debt which Greece would not be able to repay. Additionally, with Greece sinking under the burden of national debt which was initially attributed to the ECB having been buying bonds in the open markets as a way of reducing the interest rate that Greece must pay on market borrowings.

Giving rise to a very dangerous fiscal practice was the period during which the ECB began taking Greek bonds as collateral against loans to entities such as the already struggling Greek banks. In turn, this was a precarious position, as if there is a devaluation of the bonds, the entire lot will all go bust immediately, leaving the ECB with that collateral which is now worth so much less than the loan against it that it will (near, maybe,) wipe out the ECB’s capital.

The figures are rather in dispute, but there are indications that the ECB is exposed to €150-€190 billion of Greek debt, out of the €340 billion total.

Since this decision by the European Court of Justice, Switzerland’s central bank removed the 1.20 floor on the EURCHF, sending the currency markets into a veritable typhoon of volatility, causing negative balances, and in some cases, previously well-funded and long established companies to grapple for a lifeline, an exercise in which some were successful, and others were not.

Almost a week since this occurrence, economists are considering the potential exodus of Greece from the European Union, signifying the very first nation to leave as a result of unsustainability since the now debt-ridden and economically troubled EU was established.

Professor Eric Dor, Director of Economic Studies at IESEG School of Management in Lille, France, has compiled a study which explains the potential effect should Greece leave the European Union.

Professor Dor’s research begins by explaining the initial basis of the Greek loan program, which was instigated almost five years ago.

The study states that On May 2, 2010 the Eurogroup decided to launch the Greek Loan Facility which was a pooling of bilateral loans by each member state of the euro area, for an initial total amount of € 80 billion to be disbursed over the period May 2010 through June 2013. This objective was later reduced to € 77.3 billion after Slovakia decided not to participate.

This programme of bilateral loans was complemented with a commitment of IMF to lend €30 billion to Greece. When Ireland and Portugal requested themselves a bailout from other members of the euro area in November 2010 and April 2011, they ceased to participate in the Greek Loan Facility.

The loans effectively disbursed to Greece in application of the Greek Loan Facility are listed here:


The UK, which is the only region in the European Union which hosts a developed institutional electronic trading industry, with major banks, liquidity providers and exchanges operating in London to a global audience, is the only Western European nation of significance which is not party to the Greek Loan Facility, and maintains its own sovereign currency, however it is an EU member state, meaning that it is likely that the cost of writing the loans off will still affect the UK economy and in turn its currency, should Greece exit and become unable to repay the debts.

Additionally, the UK may well have to subsidize some of the losses experienced by the ECB should the bonds devalue and damage ECB capital.

Professor Dor’s research states that when a new economic adjustment programme for Greece was approved in March 2012, the euro area countries had already lent € 52.9 billion to Greece, and the IMF had already lent €20.1 billion. It was decided that what had still to be lent by euro area countries in application of the Greek Loan facility, €24.4 billion, would be added to the additional loans to be provided.

What had still to be lent by IMF, € 9.9 billion, was also added to the additional loans to be provided by this fund in application of the new program.

On May 14, 2012 Council the decision of the Eurogroup of February 20, 2012 about additional loans of euro area countries to Greece for an amount of € 120.2 billion formally approved. It was decided that these new loans, as well as those of the previous programme that had yet to be disbursed, had to be awarded by EFSF that would borrow itself the needed funds on the market with the guarantee of the euro area member countries. The loans to be disbursed by EFSF thus amounted to € 144.6 billion.

IMF also committed itself to lend € 10 billion to be added to the part of the previous programme that had yet to be disbursed for an amount of € 9.9 billion. Therefore IMF had to lend € 19.1 billion. Greece had thus to receive new loans of € 130.2 billion to be added to those of € 34.3 billion that had yet to be disbursed from the previous programme. All these loans would be split in tranches to be disbursed until 2014.

This second program was complemented with a restructuring of the part of the Greek public debt that was held by private investors. Existing bonds with an initial reimbursement value of € 199 156 515 698 were exchanged against new securities with a haircut of 53.5%. Therefore an amount of debt of € 106.549 billion was cancelled. However the Greek banks held huge amounts of the national public bonds and were thus part of the private investors that were hit by this haircut.

Professor Dor deduced that they could not afford the induced losses that considerably reduced their equity capital. It was thus necessary to recapitalize them. If the amount of new loans granted to Greece was as huge as € 120.2 billion, it is because it included the funding needed by the government to recapitalize the banks. This recapitalization amounted to € 48.2 billion. Therefore, as a consequence of the haircut, the Greek public debt was only reduced by about € 58 billion instead of the full € 106.549 billion.

On March 30, 2012, following the launch of the EMS, the Eurogroup decided that European Financial Stabilization Facility (EFSF) would continue to grant the loans which had already been scheduled previously for Greece, Portugal and Ireland. However EMS would grant the new loans that could be decided in application of new programs.

Out of the € 144.6 billion to be lent in application of the second program, EFSF has already disbursed € 141.8 billion to Greece. These loans have an average maturity of 32.38 years. Since an amount of €0.9 billion will not be used, what remains to be lent amounts to € 1.9 billion.

The loans granted by IMF are denominatated in SDR. This is why their equivalent in € is always indicative and depends on the dates at which the exchange rates are selected. The data above use the exchange rates between the EUR and the SDR at the dates of the disbursements. There remains SDR 12.55 billion to be lent by IMF to Greece. It currently amounts to € 12.68 billion.

The National Central Bank of Greece has a huge debt to the European Central Bank, related to the payments system TARGET2. This debt still amounted to € 41.7 billion in November 2014. If Greece
abandons the euro area, the new national currency will strongly depreciate with respect to the euro.

It is thus expected that the national central bank of Greece will not have the capacity to reimburse its euro denominated TARGET2 debt to the ECB. The loss incurred by the ECB will then be shared between all the remaining national central banks of the Eurosystem in proportion to thei capital share.

Indeed either the monetary income paid by the ECB to the NCB’s will be reduced for several years, either the ECB will require to be recapitalized. Ultimately the costs will be incurred by the sovereign states of the euro area, which support their NCB’s. It must be noted that the issue of a recapitalization need of the ECB or the NCB’s is debated. There are experts who observe that, technically, a central bank can function with negative equity. It is true but it is politically not plausible that Germany would accept such a situation.



European banks have sharply reduced their exposure to the public sector of Greece. For example the exposure of German banks is now limited to $181 million, whilst the exposure of French banks to the public sector of Greece is now limited to $102 million .

On this basis, whilst Professor Dor did not conclude as much, if the banks within mainland Europe have reduced their exposure to Greek debt in the private and public sectors, the losses emanating from the ECB and central European government departments may be enough to cause the ECB a significant difficulty, which in itself is a potential cause for euro devaluation, however if countries begin leaving the union, this could be a signal that it may fragment further, thus having a potentially vast effect on the value of the euro.

For the full study by Professor Eric Dor, click here.

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