Why Greece Matters A Lot: The Case Of Europe's Falling Dominoes

Tyler Durden's picture

Over the weekend, we showed why contrary to unfounded speculation that Greece is entirely contained, there are still extensive linkages when it comes to the fallout a Grexit would reap if not directly on private commercial banks which over the years managed to offload their Greek exposure to the Europe's taxpayers....

... but on the sovereign economies of the Eurozone as well as the ECB, at first via the EFSF, then also via the SMP, the MRO, Target 2 and so on.

Overnight, Barclays took this analysis and also showed the absolute national euro exposure to Greece broken down by bailout program and also as a % of respective host nation's GDP. What it found is the following:

And here is what it looks like when we redo our prior chart showing just European Grexit exposure via EFSF, to total sovereign exposure as a % of GDP. The total amount in question: €341 billion, or just about 3.4% of the €10 trillion in notional European GDP.


But wait, rules-based Europe has "firewalls" now, all laid out and proper, so there can't possibly be contagion.

Only that's not true: for example, two years after introducing the OMT, the ECB still does not even have a regular term sheet laying out the rules of what the purpose of the OMT is aside to be some massive, amorphous "whatever it takes" bazooka. And as for the ECB's QE, it is all downhill from here as net issuance in Europe trickle to a halt, and the ECB risks crushing an already illiquid bond market by monetizing even more of it. Of course, it could engage in outright stock monetization but that would be the signal that the end of the current system is truly near.

As for "rules-based", we'll just leave that to the ECB which just hiked Greek bank collateral effectively admitting the banks are insolvent, but not too insolvent, because now the ECB is officially and without doubt a political entity whose only purpose is to further political agenda.

But that's just the beginning, and as Barclays cautions investors have largely taken the view that even if the worst case scenario did unfold, the impact on portfolios would be manageable. At this point Barclays warns that it is perfectly plausible that this Sunday’s “no” vote may not follow the benign narrative that markets have largely adopted.

Below are some of the scenarios where the contagion will be worse than any algo, not to mention central banker, expects:

The backstops are not entirely infallible


Some of the backstops, if needed, are either untested or incomplete. One example might be the new banking union. At present, the €55bn resolution fund is still 95% unfunded, deposit guarantee schemes are still mostly ex-post funded and there is still no pan-European deposit insurance. More importantly, holdings of peripheral debt on domestic bank balance sheets are rising substantially in recent years. In Italy and Spain, for instance, domestic government bonds as a percent of total bank assets have risen from 1.5% and 2.3% respectively in 2009, to 6.5% and 7.8% at end 2014 and February 2015 respectively. Any period of prolonged, significant peripheral stress would almost surely lead to some, perhaps significant, widening in bank credit spreads.


As for the ECB’s OMT programme, it has never been tested and it is not quite the pure “lender of last resort” backstop many in the market have come to believe it to be. To start, ECB OMT purchases come with significant conditionality. Any country seeking this assistance must apply for a programme, which would almost surely come with fiscal and structural reform prescriptions.


Greek exit and an official sector default would be new precedents


The biggest risk for contagion, in our view, is that the Greek “no” vote would most likely set in motion two precedents – an exit and default of official sector debt – that have never really been stress tested in the euro zone, either technically, or perhaps more importantly, politically.


Greek default would have a non-negligible effect on EA balance sheets… 


As we have said in the past, a default on official sector debt would be large, but technically manageable, at about EUR195bn in bilateral loans and EFSF/ESM loans. In addition, SMP bonds held by the ECB amount to EUR27.7bn and Intra Eurosystem liabilities (mainly Target 2) amount to EUR118bn. Altogether, the official exposure to Greece amounts to about EUR340bn, nearly 3.5% of EA’s GDP, sizeable but probably manageable [ZH: and enough to push the Eurozone into a depression if the entire liability is written off].


... while a default opens up a host of political risks that remain unanswered


A default on the European loans could create considerable political backlash in EA countries against further support for periphery economies. Right-wing parties, such as AfD in Germany, Front National in France, Party of Freedom in the Netherlands, and True Finns in Finland, have repeatedly opposed bail-outs to periphery countries, especially to Greece. But even more moderate parties may question the bail-out mechanisms as the Greek default of 2012 was meant to be a one-off. Smaller countries are also unlikely to take it lightly as; as a percentage of their country GDPs, these countries would bear a larger share of the burden (eg, the Baltic countries).

All of this puts into perspective today's ECB decision to raise Greek haircuts, because as Goldman noted two weeks ago, it appears to have ultimately been the ECB's intention to launch a controlled Grexit contagion, one where Europe will see a steep but not too dramatic drop in its GDP, and perhaps a triple-dip recession can be avoided once more with some new changes in the definition of what GDP is, all so Mario can pull a Kuroda from October 31, 2014 and increase the ECB's QE just so European stocks rise higher, and just as importantly, the EUR slides even more (some 7 figures according to Goldman) toward parity which make both Europe's - really Goldman's - bankers delighted when gettting their year end bonus, and keep Germany's exporters happy.

As for the collateral damage, i.e., millions of broke Greeks who just lost everything, you know what they say about making a QE omelette.

Curiously, the German government hasn’t published estimates of how much it could lose in case of a default, arguing that this scenario could unfold in too many different ways. However, as the WSJ reports, according to the Munich-based Ifo economic institute, total German exposure to Greece, including the loans and a host of other liabilities, at €88 billion while S&P estimates it at €91 billion. This is in line with the estimate shown above.

According to Jens Boysen-Hogrefe, economist with Kiel-based institute Ifo, the hit “would hardly be noticeable for Germans." He may be right, but where he is wrong is looking at Greece as an isolated case: since Europe is, or rather was, a union, one has to evaluate the combined impact of a third of a trillion in impaired assets across the Eurozone. For the vast majority of European nations, the effect of a "write-off" of 3-4% of GDP would be sufficient to launch a depression, which would then promptly drag Germany lower as well, adverse impact (and thus quite welcome to Germany) on the EUR notwithstanding.

We just hope that the ECB has done its math right and what it believes will be the contained demolition of Greece does not spiral out into an out of control tumble of dominoes, because not even a hollow "whatever it takes" threat from Draghi would offset that, especially if and when the deposit run moves from Greece to Italy, Spain and the rest of the Europe.

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Big Corked Boots's picture

Need to put the USA on that chart.

Just so we can see how bad things really are.

UndergroundPost's picture

Greece exit turns PIIGS into PIIS (pronouced PISS) which is what markets will be doing all over themselves once the contagion starts leaking.

Ham-bone's picture

Greece, Puerto Rico are the leading edge of the demographic and population winter we are entering...but check the engines of growth, China, Brazil, and soon India also facing negative birth rates. 

As population growth slows, as credit growth slows, interest rates alreaddy at ZIRP...the only things left are government debt, more CB leverage, and derivatives beyond belief.  These are filling the void...but an inflection point is likely here and going to hit us sometime in '15.


ZerOhead's picture

At 2.4% of GDP it turns out that Greece itself is least exposed to the Greek default. Other than Irelands piddling 1.5% exposure.

So funny...

Divine Wind's picture




It would be well worth the time for readers to check out today's coverage by Martin Armstrong concerning the situation on the ground in Greece.

As opposed to DOOM, the majority, at least for the moment, are in great spirits, merchants are accepting credit cards, suppliers are honoring contracts and there are not massive lines at ATMs. [Granted, they do not have a sizeable dindu contingent going nuts and burning their own neighborhoods at the mere thought of freeshit cutbacks...., but, whatever.]


He may be hated on ZH for his views on gold, but his insights on the Greek situation are well worth your consideration.

toothpicker's picture

Well, gold is the only truth in this mess...

ILLILLILLI's picture

"Hi...I'd like to order a truckload of massive, amorphous "whatever it takes" bazookas, please. Yes...rush delivery, please!"

M.B. Drapier's picture

Ireland sagely went into its own Troika program at around the time of the Greek "rescue", thus reducing (but not, of course, eliminating!) its share of the Greek "rescue". Yes, you couldn't make it up.


It's all a hoot and a hollar until the devaluation of the dollar.  But if the US still holds most of the Gold, it might soften the blow.  Since I have to transact in dollars I hope the USD stays stable.  But in the end, like ALWAYS, the outcome will be who has the Gold?  The EU holds like 10,000T of Gold combined between its members right?  How much of that 10K T is being physically stored on US soil?  If everything comes crashing down, would the US re-patriot that phys?  My imagination resists that possibility.

TeMpTeK's picture

"The EU holds like 10,000T of Gold combined between its members"

 What would happen if they unleashed the gold price??  Suddenly solvent?

two hoots's picture

The FED has us on a hook for $4.7T.

LawsofPhysics's picture

Sure, sure...  ...but so long as you brought it up, who is behind the Fed exactly?  Sounds like a good excuse for a full fucking audit. Sorry, I don't see that happening, ever.

boogerbently's picture

Kicking Greece out is the only way to AVOID contagion.

Otherwise, all indebted countries will want their debt "forgiven".

Interesting that Greece finds their debt to the EU "odious", but can't understand EU finding further loans to them odious.

Contagion unlikely after the others see what Greece will be going thru.

disabledvet's picture

I believ this is a "contagion" too and not a set of falling domino's ala Wall Street 2008.

"If Europe defaults on their zero percent debt ALL DEBT BECOMES SUSPECT."

And....SURE AS SHIT...Puerto Rico coughs up a 68 BILLION dollar hairball.

So now everyone is defaulting to the dollar itself?

Good luck finding any....

Smegley Wanxalot's picture

No worries abut the USA.  Just overheard the guy in the next cube who openly said "oh, that greek thing can't happen here. We are a lot better managed than they are."

I kid you not. He also has that empty look in his eyes - the one where he gets up every day baffled at the concept that he doesn't know whether to take a shower or take a shit.  And sadly, he votes.

Big Corked Boots's picture

Ask him what's new with the Kardassians. I'm sure he knows.

Au_Ag_CuPbCu's picture

I bet he procreates too...the bastard!

Wakemaker's picture

One of the talking heads on Bloomberg this morning was talking to a former Greek treasury official and the guy mentions the possibility of Bail-ins, So of course the talking head ends the interview with "your the first optomistic person I've talked to today." We all know who bloomie answers to.

Salah's picture

but we have a secret base on the Moon where we've been mining gold.....   HA-HA.

DavidC's picture


From the 40 minute mark - dominoes just waiting to go.


zorba THE GREEK's picture

It looks like they left U.S.A off the domino map. If everyone in Europe goes down, The U.S. Will soon follow..

zorba THE GREEK's picture

I see corked boots and I had the same thought. No Western country is an island at this point.

o01tac's picture

The first in the line up is Ireland which happens to be an island ;-)

two hoots's picture

The $/EURO (and banks) is more joined at the hip than many think.   China going nuts with Yaun stuff impacts us little.

disabledvet's picture


"Greece" simply makes no sense to me...not what the Greeks (and soon many others) just did...but the oddity of defaulting to the IMF.

That wasn't "Greece" that missed that payment...that was the E....C.....B!

"And now folks are speculating as to whether the ECB will get paid."


Wow...far oit dude. Pass the popcorn AND fhe bong!

JustObserving's picture

The actual loss due a Greek bond default is small compared to high interest rates that Western countries will have to pay to borrow money in the future.  No more NIRP.  No more ZIRP.

Good luck servicing your sky-high debt at positive, real interest rates.

LawsofPhysics's picture

No debt to "service" after a jubilee!!  Fuck, the bankers/financiers would have to actually work for a fucking living...

sounds good to me.

disabledvet's picture

If your Government is REALLY REALLY SMALL maybe.

I mean...once you default to the IMF....well, the phone was ringing off the hook right back to them in one week!

"Sorry, NO DOLLARS FOR YOU!" And off to Moscow Ms LaGarde goes...

LawsofPhysics's picture

"rules", LMFAO!!!   Ask John Corzine and Lloyd Blamkfein about "rules"...

Son of Loki's picture

"Rules" are 4 the little peeples.

Kirk2NCC1701's picture

So is Honesty and Integrity.  Lest the poor steal back what was stolen from them.

Motorhead's picture

Hang those mother fuckers.

lawyer4anarchists's picture

Whatever the numbers the fact remains. Most of the debt is fake. It was a creation of the fiat currency system, no different than the US dollar.  It is criminal. It is a taking without any value. It is a violation of the 5th amendment.  Our "money"  was imposed on us through a court packing scheme you never heard of.  Such is the way they operate. http://www.thetruthaboutthelaw.com/they-make-you-use-money-that-is-backe...

LawsofPhysics's picture

^^^this, moreover, you cannot get blood from a stone.  If the fuckers push too hard they will slit their own throats as more and more people dig into all the bullshit "mark to fantasy" accounting. 

I put forth the proposition that the bankers/financiers have been their own undoing as they are nothing but overcompensated useless middlemen between the printer/computer (where "money is now created without real work) and the producer/consumer in the real economy.

Congrats guys, here's to hoping you fuckers make good fertillizer.

El Vaquero's picture

That is my thought.  They created a system that requires perpetual growth that they could skim off of, and perpetual growth is flat out not possible.  The less growth, the more they have resorted to fraud to keep the system going, but there will come a day when, even with the fraud, physics will kick the fuck out of their ponzi scheme. 


The sad part in all of this is, when the food supply gets less reliable, most people wouldn't come up with the idea of growing their own.  They'll have to be told, or see somebody else doing it. 

Rainman's picture

Golf clap for the boyz... much as i hate to say it , a 15 year long euro ponzicon was quite a feat !

falak pema's picture

Looks like Mutti is gonna brazen it out.

Will Tsipras now call their bluff inspite of Yanis's departure?

Greece must not back down if ECB/IMF/MUTTI get tuff.

Just Grexit and tell them to go stuff it. Find your money in other ways.

bidaskspread's picture

"one has to evaluate the combined impact of a third of a trillion in impaired assets across the Eurozone" with banks leverage at 26 to 1.

cowdiddly's picture

Right, with banks only required to hold about 5% in actual reserves, with a mere 1% of non-preforming other loans yer belly up in a Greek default. With this said, every one of these countries banks are being allowed to operate in a bankrupt state (WITHOUT CONSIDERING the Derivative bomb going off) . Do you have money in any of these countries banks? Or, are you waiting for your turn to play dumb at the ATM? They are not going to warn you when the window slams shut and the big money gets tipped off and exits at the speed of fiber optic light today. Chose wisely.

And for those of you with a short memory, that G20 meeting in I believe Hawaii a few years back was not for your interest, but legalized the Cyprus bail-in  blueprint in just about every western nation Canada and US included. Shoulda listened to what Gramps had to say when he went droning on about the Great depression, If you listened, you know what to do.

M.B. Drapier's picture

I've said it before, but boy did Estonia, Slovenia and Slovakia (and Malta, wth?) get rolled. Thank you for your contribution to Greek recovery ... I mean Eurozone financial stability ... I mean EU-core megabanks, New European model students! Gold stars for you.

Motorhead's picture

Bunch of naive fucks...unless they had their "marching orders".

M.B. Drapier's picture

A bit of both. I'm almost certain there wasn't hitmen or blackmail or suitcases of cash involved. And people really do tend to believe the Union's European-progress-and-prosperity narrative out in small, striving EU countries. (And like most narratives it isn't totally false either.) But the prospect of nice jobs on the massive EU gravy train is also a powerful extra incentive for politicians, economists, civil servants and so on to go with the flow and not look behind the curtain.

layman_please's picture

when the eastern europe finally arrived to the table, it was time to foot the bill.

Firewood's picture
Firewood (not verified) Jul 6, 2015 3:54 PM



United Snakes of Urupp does Greece...again


Onward to the past



Motorhead's picture

So, if the US is supposed to "support" Greece because it is a member of NATO, then will the US "support" all of the bagholders of all things Greek who are also NATO members (or wanna-be NATO members)?

Firewood's picture
Firewood (not verified) Jul 6, 2015 3:56 PM

"Find your money in other ways."

Falak Pema



How about printing it?