Berlin. As the specter looms ever larger of a Greek exit from the eurozone, economists have been making highly complex calculations of how much that bombshell would cost — with estimates as high as $1 trillion.
The approximations vary widely with the one thing most analysts agree on being that the cost of a Greek exit — or “Grexit” — is “incalculable” and depends how many knock-on effects are taken into account.
The direct costs, analysts at German lender DekaBank, relate to the hit other European countries and the International Monetary Fund would have to take on their holdings on Greek debt if Greece were to default and leave the euro.
Via its bailout fund, the European Financial Stability Facility, the EU has already lent billions of euros to Athens.
At the same time, the European Central Bank holds an estimated 50-55 billion euros of Greek paper, which would become effectively worthless.
In addition to this is the so-called Target 2 interbank payments the Greek central bank owes the European Central Bank, which economists at Swiss bank UBS put at 104 billion euros.
UBS analysts put the total direct costs of a “Grexit” at 225 billion euros, DekaBank at 350 billion euros, of which 86 billion euros would be borne by Germany alone.
Douglas McWilliams, however, from the Britain-based Centre for Economics and Business Research this week put the figure at $1 trillion, around five percent of eurozone GDP, if the break-up of the bloc is “unplanned”.
While the direct costs are large enough, what really scares economists is the spillover effects of a Greek departure, especially the “contagion” risks threatening other fragile eurozone economies such as Italy and Spain.
“The mechanism that worries us the most would be the likelihood of bank runs in the periphery,” said Stephane Deo from UBS.
“If Greece indeed leaves and the drachma loses half of its value, or more, it would become obvious to depositors in other parts of Europe that their deposits are at risk and we thus see a bank run as a possible scenario,” he said.
In such a situation, with the prospect of major social disorder, the ECB and governments would have to step in, offering further billions to the bailouts already agreed to Ireland, Greece and Portugal, economists say.
Hans-Werner Sinn, president of the respected Ifo institute in Germany, has spoken of the bill for Germany alone being near one trillion euros if the eurozone disintegrates in the wake of a Greece exit.
No wonder that German Chancellor Angela Merkel and French President Francois Hollande used their first news conference together to stress that they wanted to keep Greece in the club, given the cost of the alternative.
The president of the European Parliament, Martin Schulz, warned on Friday that the Greek economy “would collapse within days” and require other European countries to plough more billions into Athens in emergency funds.
“You can always lay out scenarios from the comfort of a research institute … but the political reality is a bit different,” Schulz told German radio while on a visit to Athens.
But the idea of Greece leaving the eurozone, unmentionable only a few weeks ago, has slipped increasingly into public discourse, with even ECB governing council members such as Belgium’s Luc Coene talking of an “amiable divorce”.
And some senior figures even in Berlin have said Europe is in a better position to cope with the fall-out after erecting a “firewall” of close to $1 trillion.
Former German economy minister Rainer Bruederle, a close Merkel ally, told Handelsblatt business daily: “Unlike two years ago, the eurozone today could cope with a Greek exit.”
Charles Dallara, who heads the Institute of International Finance, a grouping of leading banks around the globe, decided not to give a precise figure when asked about the costs of a “Grexit”.
He said it would range from “somewhere between catastrophic and Armageddon”.