Consequences of Debt Restructuring What Would a Greek Haircut Mean for Germany?

The Frankfurt skyline: What would a Greek haircut mean for Germany?
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The Frankfurt skyline: What would a Greek haircut mean for Germany?

Part 2: Sufficient Capital to Avoid Trouble


The rest of Germany's regional banks, which are known as Landesbanken and are predominantly owned by individual federal states and savings banks, collectively have about €2.5 billion in outstanding loans to the Greek government. But none of the institutions, however, would be left seriously in trouble by a drastic haircut -- they have sufficient capital at their disposal.

Of mild comfort is the fact that the state would probably not have to come to the rescue of any private institutions. Commerzbank, Deutsche Bank and the DZ Bank, which acts as the central bank for Germany's roughly 1,200 partly state-owned co-operative banks, are (once again) in a position to be able to cope with possible shortfalls by themselves.

German Banks' Exposure to Greek Debt

Institute Total debt (in € mil.)
Commerzbank 2,900
Deutsche Bank (including Postbank) 1,601
DZ Bank 1,002
Landesbank Baden-Württemberg 1,389
Landesbank Berlin 364
HSH Nordbank 295
NordLB 197
BayernLB 121
WestLB 97
Landesbank Hessen-Thüringen 78
FMS Wertmanagement (bad bank for Hypo Real Estate) 7,400
Erste Abwicklungsanstalt (bad bank for WestLB) 1,400
Kreditanstalt für Wiederaufbau (KfW) 8,400

Source: Company figures, some values are estimates

This is aided by the fact that the write-offs at places like Deutsche Bank might be smaller than the amount involved (€1.6 billion) would suggest. Sources close to Germany's largest bank have indicated that the bulk of the Greek securities have already been accordingly revalued. Even if worst comes to worst, any additional reduction in value would tend to be limited.

The situation would also be manageable for German insurance companies. A year ago, the industry assumed that up to 1 percent of all its investments were in Greek government securities. But since then, the figure is estimated to have fallen well below 0.5 percent, which corresponds to a maximum value of €6 billion.

A debt restructuring of 50 percent would therefore see write-offs of at most €3 billion. In view of insurance companies' total investments of €1.2 trillion, it is probable that no single company would find itself in serious trouble -- and almost no individual customer would feel the consequences in their life or pension insurance policies.

Fund Investors have Little to Fear

Fund investors also have little to fear. With the four largest providers, which manage more than two-thirds of the money, the risks are minimal to non-existent:

  • DWS invested less than 1 percent of its assets in Greece. The value of most of this has already been adjusted.
  • Deka only has one fund which still holds Greek government securities. Even in this product, they do not play any significant role.
  • At Union Investment, the share of total assets held in the form of Greek government bonds is very low, at below 0.15 percent.
  • Of the big four, Allianz Global Investors took the most thorough approach to dealing with the issue. Today, the asset-management firm no longer holds even a single cent in Greek debt.
  • A drastic restructuring of Greek debt would therefore lead neither to a collapse of private banks nor to the implosion of the insurance sector in Germany, and would scarcely affect the fund investors.

    Risk to Taxpayers

    But the situation looks different for the German government and the federal states. At the very least, the large exposure of KfW and the bad banks of Hypo Real Estate and WestLB could end up being expensive. Taxpayers might need to step in, as might the savings banks that are owned by municipalities.

    In addition, the European Central Bank (ECB) has bought up tens of billions of euros of Greek sovereign bonds. Because the Bundesbank, Germany's central bank, holds more than a quarter of the ECB's capital, it would have to take its share of losses accordingly.

    So nothing to worry about, then? Not quite, even if a debt haircut for Greece would appear to be manageable for Germany. The greatest dangers of such a course of action lurk elsewhere. The Greek banking system would probably break down, while the country would find itself unable to borrow on the financial markets for a long time.

    And a partial Greek default could also result in an aggravation of the euro crisis for a different reason. If Ireland and Portugal were to be infected by the debt restructuring virus, the situation would quickly spin out of control. In that event, private banks, insurance companies and investors in Germany would definitely feel the consequences.

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    PHOEVOS 05/29/2011
    1. Scare Tactics or Somber Assessment?
    It is difficult to discern whether this is a journalistic matter of fact analysis of the present condition or simply scare tactics of the worst kind. Time will tell.
    BTraven 05/30/2011
    2.
    So why the fuss?
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