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.

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

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

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.

Manageable Consequences

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?

  • Would banks go bankrupt?
  • Would insurance companies have to write off billions?
  • Would fund investors face drastic losses?
  • 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.)
    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

    With €7.4 billion in loans to Athens, FMS Wertmanagement is the second-largest German creditor to the Greek government. But behind the reassuring name -- "Wertmanagement" can be translated as "value management" -- is the bad bank for Hypo Real Estate, which had to be nationalized during the financial crisis. Similarly, the bad bank for Düsseldorf-based regional bank WestLB -- which bears the not overly trust-inspiring name "Erste Abwicklungsanstalt" ("primary liquidation establishment") -- also holds roughly €1.4 billion in Greek sovereign bonds.

    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.

    Discuss this issue with other readers!
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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
    So why the fuss?
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