Consequences of Debt Restructuring 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.)|
|Deutsche Bank (including Postbank)||1,601|
|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
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:
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.
- Part 1: What Would a Greek Haircut Mean for Germany?
- Part 2: Sufficient Capital to Avoid Trouble