Consequences of Debt Restructuring What Would a Greek Haircut Mean for Germany?
It's the worst-case scenario: Greece no longer able to get loans, with creditors having to wave goodbye to a chunk of their money. But what would it mean for Germany? Would the state have to bail out the banks again, and would private investors also suffer badly? SPIEGEL ONLINE takes a look at the likely consequences.
It may only be a small passage in the statutes of the International Monetary Fund (IMF), but it is the bottom line: An organization can lend money to a country only if it is certain the state will remain solvent for at least one year. Washington experts are increasingly doubtful that this minimum requirement can be guaranteed in the case of Greece.
The heavily-indebted state is due to receive a further tranche of its 110 billion bailout package -- one-third of which is provided by the IMF, with the other two-thirds coming from the European Union -- at the end of June. But if the Greek austerity and privatization measures do not meet the IMF's requirements, with the result that the fund decides not to release the payment, Greece could face the prospect of default.
Whether the euro-zone countries would take over the IMF's share in such a scenario is unclear. Which is why Greece's European partners are probably not too unhappy about the IMF's doubts. They function as a warning signal for Greece that the chips are down: Time to stop playing around.
In any case, the situation has led to another grim scenario, one which has been discussed on the financial markets for weeks, becoming more likely: Greece has so much debt that the state is hardly likely to ever be able to fully repay the money to its foreign creditors. Most, if not all, now accept that some form of debt restructuring will be necessary, and that this could involve reductions of up to half of Greece's debt.
A debt reduction -- known as a "haircut" -- of as much as 50 percent would be an expensive proposition for Greece's creditors. With around 330 billion ($467 billion) in loans, that would mean cutting as much as 165 billion. Most of Greece's debt is with foreign creditors, and so foreign banks and governments would have to take massive hits over the loans Athens is unable to repay in full.
But what would this mean in reality for Germany?
The answer to all of these questions is reassuring -- at least at first glance. The consequences of a debt write-off against the government in Athens would be manageable for Germany. At the moment, some 25 billion in Greek debt is held by Germany's commercial banks and the so-called "bad banks" set up to take on toxic assets. This debt takes the form of either Greek sovereign bonds in their portfolios or loans made to the Greek government.
Greece's biggest creditor in Germany is the government-owned KfW development bank. So far, the government's all-purpose bank for urgently-needed cash injections has approved loans worth 8.4 billion to Athens, which were paid out as part of the European and IMF rescue package. Since Germany's federal government acted as the loans' guarantor, the finance minister would have to make up for any shortfalls. If Greece gets a 50 percent haircut on its loans, that would cost the ministry more than 4 billion.
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
With a 50-percent haircut, the two bad banks would lose around 4.4 billion in total. Taxpayers would end up indirectly footing the bill.
- Part 1: What Would a Greek Haircut Mean for Germany?
- Part 2: Sufficient Capital to Avoid Trouble