What got me thinking about this in detail was a recent statement by Financial Times writer Wolfgang Münchau that France and Germany stand to forfeit €160 billion if Greece defaults.
On January 22, I had French exposure at €55 billion and German exposure at €73 billion, a total of €128 billion.
See Revised Greek Default Scenario: Liabilities Shifted to German and French Taxpayers; Bluff of the Day Revisited
The difference between our numbers is almost all due to a huge jump in Target2 imbalances. Let's take a look.
Partial Table of Liabilities January 22
| IESEG | Bilateral loans | Guarantees on the borrowings of EFSF to fund its loans | Implicit share of TARGET2 claims of the Eurosystem | Implicit share in the SMP holdings of bonds by the Eurosystem | Total |
|---|---|---|---|---|---|
| France | 11.389 | 31.02 | 8.651 | 4.148 | 55.209 |
| Germany | 15.165 | 41.308 | 10.981 | 5.266 | 72.72 |
| Italy | 10.008 | 27.259 | 7.511 | 3.602 | 48.380 |
| Spain | 6.65 | 18.113 | 5.394 | 2.587 | 32.744 |
| Total | 52.9 | 141.8 | 41.709 | 20 | 256.409 |
The above table derived from Exposure of European Countries to Greece by Dr. Eric Dor, IESEG School of management.
The total does not add up because I included only France, Germany, Italy, and Spain.
Partial Table of Liabilities March 4
| IESEG | Bilateral loans | Guarantees on the borrowings of EFSF to fund its loans | Implicit share of TARGET2 claims of the Eurosystem | Implicit share in the SMP holdings of bonds by the Eurosystem | Total |
|---|---|---|---|---|---|
| France | 11.389 | 31.02 | 15.308 | 5.439 | 63.156 |
| Germany | 15.165 | 41.308 | 19.430 | 6.903 | 82.806 |
| Italy | 10.008 | 27.259 | 13.291 | 4.722 | 55.280 |
| Spain | 6.65 | 18.112 | 9.545 | 3.391 | 37.698 |
| Total | 52.9 | 141.8 | 75.994 | 27 | 297.694 |
On March 4, the taxpayer liability of France and Germany increased to approximately €145 billion. The liability of the "big four" jumped from €209 billion to €239 billion.
Target2 Now
Yesterday, reader Lars from Norway pinged me with these thoughts.
Hello MishMath at €118 Billion
Draghi revealed today that the current Intra-Eurosystem liabilities of the Bank of Greece is €118 billion. It is unclear if this is Target2 plus banknotes. If it is, then the increase since end April is only €3 billion. That's not much, but the €118 billion represent 66% of Greek GDP. It's also a little more than 2 times ECBs equity.
The Bank of Greece has not published the end of May balance sheet yet. They normally do that mid-month.
The ECB will continue to extend liquidity to Greece as long as collateral is provided. I suppose that collateral will collapse in value if Greece defaults.
Draghi is either very brave or very stupid. Then again, he says his approach is rules based, so he is on auto pilot.
The Greek drama will continue as long as liquidity is provided by ECB to Greece.
Regards Lars
At the best case scenario (not counting additional cash under the mattress by Greek citizens), Target2 is a minimum of €118 billion.
Assuming the other numbers don't change much (the first two columns shouldn't change at all) the math looks something like this.
| Mish Calc | Bilateral loans | Guarantees on the borrowings of EFSF to fund its loans | Implicit share of TARGET2 claims of the Eurosystem | Implicit share in the SMP holdings of bonds by the Eurosystem | Total |
|---|---|---|---|---|---|
| France | 11.389 | 31.02 | 24.47 | 5.439 | 72.32 |
| Germany | 15.165 | 41.308 | 31.07 | 6.903 | 94.45 |
| Italy | 10.008 | 27.259 | 21.25 | 4.722 | 63.24 |
| Spain | 6.65 | 18.112 | 15.26 | 3.391 | 43.41 |
| Total | 52.9 | 141.8 | 118.0 | 27 | 339.7 |
I took the IESEG numbers and plugged in €118 billion as a total Target2 liability, split as shown.
Germany and France total liability by this calculation is about €167 billion, a number very close to Wolfgang Münchau's calculation of €160 billion, and up from approximately €128 billion at the end of January.
The "big four" liability is now about €273 billion. Can someone, anyone tell me where Italy can or will come up with €63 billion or Spain with €43 billion?
Loaded Gun Question
Previously I asked "Who has the loaded gun and who doesn't?"
"If Greece is smart, it will not implement capital controls until the ECB shuts down the ELA, forcing the issue. Greece will then have the ECB and Germany to blame for the resultant controls."
Traditional analysis failed miserably. Nearly all, if not all of mainstream media, thought the creditors had the upper hand.
Quoting Bob Dylan I said "When you ain't got nothing, you got nothing to lose" (See "Air of Unreality"; "Do You Feel Lucky, Punk?"; Who Has the Gun?)
Germany Still Trapped
The only way Germany can stop Target2 from rising further is to shut off the ELA. The moment it does so, the ECB or Germany gets the blame.
In situations like these, the sooner you take the punishment the better. But here we are, with increased capital flight every day.
Germans can and will point the finger for this one at Angela Merkel, yet another victory for Greece.
Horrified Syriza Demands 'Icelandic' Default
Today we learn the EU is calling an emergency meeting. Good luck with that. There's nothing they can do at this point. Didn't they say just yesterday the ball in in Greece's court?
Today we also learned the Syriza Left Demands 'Icelandic' Default as Defiance Stiffens.
The radical wing of Greece's Syriza party is to table plans over coming days for an Icelandic-style default and a nationalisation of the Greek banking system, deeming it pointless to continue talks with Europe's creditor powers.Central Bank Arrogance
Syriza sources say measures being drafted include capital controls and the establishment of a sovereign central bank able to stand behind a new financial system. While some form of dual currency might be possible in theory, such a structure would be incompatible with euro membership and would imply a rapid return to the drachma.
The confidential plans were circulating over the weekend and have the backing of 30 MPs from the Aristeri Platforma or 'Left Platform', as well as other hard-line groupings in Syriza's spectrum. It is understood that the nationalist ANEL party in the ruling coalition is also willing to force a rupture with creditors, if need be.
"This goes well beyond the Left Platform. We are talking serious numbers," said one Syriza MP involved in the draft.
"We are all horrified by the idea of surrender, and we will not allow ourselves to be throttled to death by European monetary union," he told the Telegraph.
Mr Tsipras warned over the weekend in the clearest terms to date that Greece's creditors should not push him too far. "Our only criterion is an end to the 'memoranda of servitude' and an exit from the crisis," he said.
"If Europe wants the division and the perpetuation of servitude, we will take the plunge and issue a 'big no'. We will fight for the dignity of the people and our sovereignty," he said.
European officials examined 'war game' scenarios of a Greek default in Bratislava on Thursday, admitting for the first time that they may need a Plan B after all. They have been negotiating on the assumption that Syriza must be bluffing, and will ultimately capitulate. Little thought has gone into possibility that key figures in Athens may be thinking along entirely different lines.
Recall the statement: "There is No Plan B"?
Let's go back much further. Does anyone even recall the start of this nonsense?
Of course, it goes back to the creation of the eurozone in the first place. A monetary union without a fiscal union is inevitably going to break apart.
And the eurozone never should have admitted Greece in the first place.
But I am referring to statements by prior ECB president Jean-Claude Trichet regarding no haircuts and no defaults.
Here is a small snip from my July 7, 2011 article Trichet Says "No" to Selective Default.
The ECB has proved a major stumbling block in agreeing a second rescue plan for Greece as it has threatened to refuse restructured Greek bonds as collateral in its lending operations in the event of a default or a "restricted default," which ratings agencies are threatening to impose.I responded "Trichet can shout 'no default' from the mountain tops but it is not his call to make."
"We say no to selective default," Trichet said.
Trichet Ballistic Over Term "Soft Restructuring"
On May 19, 2011 I noted Trichet Goes Ballistic, Walks Out of Meeting Over the Term "Soft Restructuring"
Prior to that Trichet said numerous times there would be "no haircuts" on Greek debt.
Here we are, two major bailouts accompanied with haircuts later. Along the way, eurozone nannycrats and the ECB turned a minor problem into a €330 billion problem.
The arrogance of central bankers who believe they can control markets with talk is stunning.
Neither the ECB nor the eurozone nannycrats is in control of this situation. They don't have a loaded gun, and are not in any position to make demands.
I am curious how much longer it will take them to figure this out. I will accept as evidence they finally understand reality the moment the ECB shuts off the ELA.
At least they are working on "Plan B".
Turnabout Irony
Note the irony of it all. Germany wanted to issue a "Take it or leave it proposal to Greece".
Instead we see Greece issuing a "Restructure or we leave proposal to Germany". It's likely this was Syriza's plan all along. If so, they managed to play Germany like a finely tuned violin, allowing Greek citizens to pull cash out of banks every day for six months.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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