Europe’s banks are scrambling to make sure they are prepared for a Greek exit from the eurozone.
They would take a big direct financial hit from that, but experts have said the real worry is that Greece would the first of the dominos, to be followed by Portugal, Ireland, Spain and Italy.
The return of the drachma – which would immediately be massively devalued against the euro – means Greeks would not be able to repay foreign loans.
Philippe Waechter – Director of Economic Research at NATIXIS told euronews: “Even though Greece is not a very big part of the euro area economy (GDP), if it left there would be shock waves and it would create a new situation; it would change the balance of power within the EU; so the question is – would the cost of Greece leaving (the eurozone) be greater or less than the cost of Greece staying in?”
At the end of last year, European banks had total exposure to Greece of around 80 billion euros.
French banks stand to lose most. Credit Agricole heads the list as it owns Emporiki Bank whose customers have nearly 19 billion euros in outstanding loans.
Some economists feel that the European Central Bank’s role has to change to prevent contagion spreading from Greece to other weaker eurozone countries.
One suggestion is that the bank could become a lender of last resort, like the Federal Reserve in the United States.
With most of Greek’s private creditors having taken heavy writedowns as part of the country’s second, 130 billion euros bailout, it is estimated that the ECB, International Monetary Fund and euro zone nations hold approaching 200 billion of its debt.
“In the event of an exit, they (Greece) will default. And the loss given default will probably be very high, high enough to eliminate the ECB’s capital,” said Andrew Bosomworth, senior portfolio manager at asset manager Pimco.
“They might need recapitalisation from governments, who are not exactly in the best position to provide additional capital.”