JPMorgan Estimates Immediate Losses From Greek Exit Could Reach 400 Billion

Tyler Durden's picture

While our earlier discussion of the implications of Greece's exit from the Euro are critical reading to comprehend the real-time game of chicken occurring in front of our eyes, JPMorgan's somewhat more quantifiable estimates of the costs and contagion, given the results of the Greek election have raised market expectations of an exit of Greece from the Euro, also provide key indicators and flows that should be monitored. Identifying what has gone wrong with Greece's co-called 'adjustment' program, they go on to identify key transmission mechanisms to Spain and Italy, how it could potentially improve (Marshall-Plan-esque) and most critically, given the exponentially growing TARGET2 balances, if and when Germany throws in the towel.

JPMorgan: Greek Contagion

The results of the Greek election have raised market expectations of an exit of Greece from EMU. How exactly could this exit happen and what flows should we monitor?


Market forces could induce a Greek exit. A potential deadlock between the Greek government and the Troika which terminates funding from the EU/IMF, has the potential to create fear and panic and accelerate the capital and deposit flight out of Greece. Once this capital flight accelerates Greece would likely have to ultimately introduce capital controls. With EU funding being cut and the economic situation deteriorating, Greece will likely to start paying at least part of salaries and pensions in promissory notes or Greek bonds.


Greek banks have run out of ECB eligible collateral already and can only access Bank of Greece’s ELA, but even with ELA, the collateral, typically loans, is not unlimited. They have already borrowed €60bn via  ELA which, assuming 50% haircut corresponds to around €120bn of loan collateral. Outstanding loans are €250bn, so Greek banks have a maximum of €130bn of remaining loan collateral which allows for a maximum of €65bn of additional borrowing from Bank of Greece’s ELA.


This corresponds to around 40% of Greek bank deposits which stood at €170bn as of the end of March. The true maximum amount that Greek banks can borrow via ELA is likely though to be significantly smaller because not all loans are accepted as collateral via ELA. The alternative is for Greek banks to be allowed to issue more government guaranteed paper but the ECB can, with a 2/3rd majority, block a steep and unsustainable increase in Bank of Greece’s ELA. This would effectively cut Bank of Greece off from TARGET2 and force it to eventually issue its own money.


Unfortunately, we need to wait until the end of June for the ECB’s monthly MFI balance sheet data to get an accurate picture of the impact of Greek elections on deposits. Anecdotal evidence from the Greek press and elsewhere suggests that deposit outflows re-accelerated post elections.


It is often stated that Greece’s low primary deficit (projected at 1% or €2bn in 2012) increases the incentive for Greece to walk away from the bailout agreement. This is not true, in our view, given that Greece is still on the hook for the €6.3bn that is needed to clear general government arrears and the extra €23bn that is needed to complete the bank recapitalization plan. And as described above, a deadlock with Troika raises the risk of an accident that leads to Greece’s departure via market forces even if this was not the original intention of the Greek government.


The consequences for Greece would be clearly negative, if not catastrophic following an exit: high inflation, fuel shortages, big reduction in living standards, increase in social tensions or even unrest, political isolation internationally. This is why the chances of a Greek exit should be logically significantly below 50%.

What would the consequences for the rest likely to be?

The main direct losses correspond to the €240bn of Greek debt in official hands (EU/IMF), to €130bn of Eurosystem’s exposure to Greece via TARGET2 and a potential loss of around €25bn for European banks. This is the cross-border claims (i.e. not matched by local liabilities) that European banks (mostly French) have on Greece’s public and non-bank private sector. These immediate losses add up to €400bn. This is a big amount but let's assume that, as several people suggested this week, these immediate/direct losses are manageable. What are the indirect consequences of a Greek exit for the rest?


The wildcard is obviously contagion to Spain or Italy? Could a Greek exit create a capital and deposit flight from Spain and Italy which becomes difficult to contain? It is admittedly true that European policymakers have tried over the past year to convince markets that Greece is a special case and its problems are rather unique. We see little evidence that their efforts have paid off.


The steady selling of Spanish and Italian government bonds by non-domestic investors over the past nine months (€200bn for Italy and €80bn for Spain) suggests that markets see Greece more as a precedent for other peripherals rather than a special case. And it is not only the €800bn of Italian and Spanish government bonds still held by non-domestic investors that are likely at risk. It is also the €500bn of Italian and Spanish bank and corporate bonds and the €300bn of quoted Italian and Spanish shares held by nonresidents. And the numbers balloon if one starts looking beyond portfolio/quoted assets. Of course, the €1.4tr of Italian and €1.6tr of Spanish bank domestic deposits is the elephant in the room which a Greek exit and the introduction of capital controls by Greece has the potential to destabilize. In this respect, it is important to keep a close eye on Chart 1.

What has gone wrong with the Greek adjustment program?

After all, Greece has managed to reduce its primary deficit by 8 percentage points in two years, something that no other country has achieved. And according to Bank of Greece, given announced cuts, unit labour costs are likely to be down by 13% this year vs. the end of 2009, an adjustment that is only comparable to Ireland’s “success” story. From a technocrat’s point of view, this must be impressive performance.


Perhaps the best way to understand what went wrong with the Greek adjustment program is to compare it with Iceland’s program. On Nov 3rd 2011, the IMF issued the verdict on its 3-year adjustment program for Iceland. The IMF’s verdict was that its “program for Iceland was a success” due to 4 factors:

  1. the decision not to make taxpayers liable for bank losses.
  2. the decision not to tighten fiscal policy during the first year of the IMF program.
  3. preservation and even strengthening of Iceland’s welfare state during the crisis.
  4. prudent use of capital controls. The IMF said: “capital controls were necessary and are now seen as useful addition to policy toolkit”.

Although permissible under EU treaties, factor 4 is admittedly not consistent with a monetary union. But none of the remaining 3 factors were present in the Greek program. No debt relief was given to Greece early, the fiscal adjustment was front-loaded rather than back-loaded (a massive 5% deficit reduction was required in the first year only), and not much attention was paid to protecting those at the low end of the income distribution.

How could the situation improve?

The Marshall plan for Greece is probably the best hope. Much has been said about Greece’s Marshall plan over the past months but little has been done. Estimates are close to €20bn or 10% of Greek GDP. Assuming Greece is changing its bureaucrat and deficient administrative/tax/legal structures quickly enough to allow for fast absorption of these funds, a Marshall plan has the potential to at least stop and perhaps reverse the economic decline.




Clearly such a Marshall plan represents a transfer from the core to periphery. These transfers are necessary in a monetary union where the core diverges from the periphery or, more correctly, Germany diverges from all the rest. Charts 2 and 3 show that both TARGET2 imbalances and real GDP levels continue to show a widening gap between Germany and the rest.


Without these transfers the likelihood of repeated crisis in the euro area will remain very high especially if tight financial conditions, uncertainty and lack of private sector investment condemns the periphery to a path of rising unemployment and never ending economic decline. And unfortunately Greece is not alone in facing these persistent headwinds. As we highlighted in F&L April 27th, the drag from tight financial conditions on periphery remains heavily negative.


It is possible that necessary fiscal transfers are not politically feasible or that Germany is eventually far too different from the rest to coexist in a monetary union. In this case the horrific scenario of a break up becomes more likely. We would like to make two observations: 1) it is less painful and makes more economic sense for Germany rather than periphery to leave. See above discussion on consequences of a Greek exit for Greece, 2) the cost of a breakup is rising exponentially over time. Bundesbank TARGET2 balance reached a new high of €644bn in April.

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Temporalist's picture

That's a lot of ouzo.

THX 1178's picture

That's a lot of pastitsio, greek salad for the lady.

AldousHuxley's picture

where is your high frequency trade bots now?



jeff montanye's picture

where indeed.  

my favorite takeaway is the successful example of iceland cited by, of all sources (admittedly a quotation of the imf) j p morgan: stiff the banks, increase social safety nets and tough it out.

GetZeeGold's picture



400 billion just for Greece? Stop nickel and diming me and just give me the overall figures for everyone. I'm tired of screwing around here!


cat2's picture

News flash, those losses are already real.

GetZeeGold's picture



Plenty of road know the drill. Just kick the damn can.


krispkritter's picture


Only after the last tree has been cut down,

Only after the last river has been poisoned,

Only after the last fish has been caught,

Only then will you find that money cannot be eaten.


Cree Indian Prophecy 

Modern version: substitute 'economy', 'banker', 'Corzine', 'fiat'.


CClarity's picture

And how much has the Troika already poured in?  IMF, ECB, not to mention banks and gov'ts.  Slosh slosh losses are inevitable. Bring it on already!

JPM Hater001's picture

Love happy smile joy peace

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Love happy smile joy peace

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goldfish1's picture

When $6 Tril of counterfeit treasuries are found floating around, hub bub about $400 B seems ludicrous.

And the $500 Tril or more of derivitives...

The Morgue is showing a $5 Bil MTD loss. To put it into perspective, the entire government salary of Contra Costa County in CA for a year is roughly $2 Bil.

And the minds we have on this is Bernanke and Dimon? Wow.



cranky-old-geezer's picture



my favorite takeaway is the successful example of iceland cited by, of all sources (admittedly a quotation of the imf) j p morgan: stiff the banks, increase social safety nets and tough it out.

Stiff the banks is something no other government would dare do ...except Greece if they leave the EU.

That's what Greece would be doing, telling euro-banks fuck off, all our bonds you're holding are worthless now ...unless you can get other EU nations to pay them off ...and good luck with that.

Sure, Greece would have to bite the bullet and get it's fiscal house in order, along with the Greek people getting off their lazy asses and start producing things the rest of the world wants, or the drachma would drop in value so fast it would be another Zimbabwe.

The Greek central bank must not give in to pressures from the Greek government to print and buy government bonds, and pressures from Greek banks to print and buy all their worthless paper.  That shit has got to stop if Greece hopes to make it on their own and prevent the drachma from collapsing.

But that's the solution for ever other nation deep in debt, including America.  Stop printing currency, stop deficit spending, stop the welfare state mentality, live on taxes collected ...and stop bailing out the banks. 

There should be no currency printing beyond private sector GDP growth.  No, government spending doesn't count in GDP since government doesn't produce anything of value.


sessinpo's picture

From article

"The Marshall plan for Greece is probably the best hope."

" Clearly such a Marshall plan represents a transfer from the core to periphery."

"It is possible that necessary fiscal transfers are not politically feasible or that Germany is eventually far too different from the rest to coexist in a monetary union"



The above summarizes the article. The jist or conclusion is that it will fail. The euro is a failed expesive experiment. As economies crumble, nationalism rises which is anti monetary union.

It's basically its a lot of BS. Each day or week that we see a new plan or some political posturing is simply an attempt to delay the inevitable, or as I like to say, time for TPTB to position themselves.

mayhem_korner's picture



So the Morguesters are now the experts in estimating losses? 

    ...What's the irony index trading at today?

Manthong's picture

OK.. Marshall plan for Greece.. Chester plan for Spain, Doc plan for Portugal and the Kitty plan for Italy.

Oh.. France can be Festus.

All good..  finally?

FlyoverCountrySchmuck's picture

"Marshall Plan for Greece"

Paid for, of course, BY THE U.S. TAXPAYER

Terminus C's picture

yea, when I read this I was disturbed.  There is an obvious lack of understanding as to why the marshal plan was 'successful'.  It was designed to put the entire world on the dollar system. The official understanding of it was that we used the money (debt) to fund the reconstruction of Europe, as in to pay for the development of hard and productive assets like buildings, factories, rail lines etc... that had been destroyed by the war but in reality this was merely an expansion of the money supply.  Interestingly this rapid expansion caused severe inflation back in the US because all of that new "money" was used to purchase American manufactured goods at the end of the war, making it more difficult for Americans to access these goods (prices increased).

This new JPM "Marshall" Plan is to go into repairing imaginative assets that had been re-re-rehypothicated and are now collapsing under the weight of their own stupidity.  Dumping more debt onto these assets (being destroyed by odious debt in the first place) is the solution of the insane or the sociopath (who seeks to intentionally destroy society in order to benefit from the opportunities created by chaos).  That part of the world is already on the dollar system so... any new "Marshall Plan" is doomed to fail, though it will not fail to increase our inflation.

goldfish1's picture

Start with 1000% inflation and go from there.

Bastiat009's picture

So the euro is down and done. Banks are done too. Stocks are going nowhere. Gold is falling further everyday. US$ and US Treasurys look good. I can't figure what is the scariest position.

PhattyBuoy's picture

 ... a greek behind you!

Max Fischer's picture



The "scariest position" is clearly silver.  It's tracing the 1980 bubble/collapse identically. I can't even imagine how many silver bagholders are facing total wipeouts in the coming 12 months.

And what's so tragic about all this is that the "silver pumpers" just keep pushing more lemmings off the cliff.  Just two days ago, I read another bullshit analysis (on a different blog) by a well-known silver pumper and he said, "silver has to go down, in order to go up."  WTF?  *LOL* Really? Then why was this very same person pushing everyone into silver all the way up to $50?  Now, at $28, he thinks it needs to go further down before it can make everyone rich?  Pure delusion.  This is a perfect example of someone so fanatically and emotionally attached to his investment that he's totally incapable of recognizing how absurd his thesis is.   

How do you know if you're too fanatic about your positions?  When you see your investment continue to lose value day after day, so you convince yourself that this is 'all part of the plan' and that the more it loses, the higher it will, some day, go.  


The scariest position?  Silver. No doubt.  Silver lemmings are gonna ride that one straight into the ditch..... and when they're flat on their face, they're gonna say, "See... this is perfect... now that we lost most of our wealth, it should start to go up!" 



James_Cole's picture

I'm actually a silver skeptic to some extent (though have a large position, made $$$ selling at $47) but my God that is a moronic chart comparison.

Nothing on the two charts relates (timeframes / price moves), give your head a shake.

James_Cole's picture

Also, as that chart is from 2011, continue the line and the comparison is even more asinine.

Max Fischer's picture



Who cares if the x-axis is off a bit...even the author says the time scale is not accurate.  It doesn't matter at all.  If you can't see the similarities, then nothing I could say would convince you.  You'll see whatever you want to see.  

By the way, when you tell others on the internet that you timed the top of a bursting bubble perfectly, no one believes you.


James_Cole's picture

Both axis are way off. Take any commodity and you'll be able to find such historical comparisons which may or may not be useful, this case being the latter (actually PROVING itself useless).

I didn't time it, it was a combination of luck, distrust in the sudden moves / lack of fundamentals. But having bought in at 28$ there were lots of other times to offload at a quick profit. My point was only that I'm not anti silver, though I would agree it is in a sustained bubble.

Your chart was just crap.  

jeff montanye's picture

and would the utterly different stances of central banks between 1980 and 2012 figure in at all (20% short rates vs. zero, money supply restriction vs. growth without historical parallel in the u.s. and eurozone)?


GetZeeGold's picture



Wait till our Weimar returns start rolling in. Wheel barrels chocked full of cash!


francis_sawyer's picture

 "You'll see whatever you want to see..."


What I see is that $50 top looks like your pointy head...

Camtender's picture

So, I guess the dollar & treasuries, which are being created by the billions each day, is the way to go....

Thanks MF for enlightening us. BTW, did you for get the "G"?

Max Fischer's picture



Returns for 2011:

10-year bond:  17%

30-year bond:  35%

Gold:             10%


Paper wins. 


TWSceptic's picture

Cherry picking is not going to make you look better.

GetZeeGold's picture



Let them eat cherries....we only accept gold. How many would you like?


Dermasolarapaterraphatrima's picture

"...Greece will likely to start paying at least part of salaries and pensions in promissory note...."


Maybe California has some of those 'IOUs' left over they can lend to Greece?

GetZeeGold's picture



On come on......Jerry is in charge. What could go wrong?


"Join our campaign to get California working again"


goldfish1's picture

California - only $ 16 Bil deficit so they say.


California square miles: 163,707

Greece: 50,944


sessinpo's picture

According to Morningstar, Treasuries scored an annualized return of 11.03% a year over the past 30 years, squeaking past the 10.98% annualized return of the S&P 500 in that time.

ToddANON's picture

On a long enough timeline everything looks the same.

Central Wanker's picture

In year 1980, people bought silver for speculation.

Today, people buy silver for protection.

See the difference?

Max Fischer's picture



That's not true. Just more silver disinformation. 

The overwhelming majority of silver that's traded is used for industrial applications.... this normally consumes ~500 million ounces yearly.  When you say "for protection" I'll assume that's the same as buying for an investment.  For most of this past decade, silver consumption as an investment equaled anywhere from ~30 million ounces to a high of 118 million ounces last year when all the goons and lemmings worked everyone into a fever pitch. Over the last ten years, there was usually well under 100 million ounces purchased for investment.  


ThirdWorldDude's picture

God is my witness how much I dispise speculators like yourself!


1. Here on ZH we're not talking about paper. A physical oz will remain 31.1 g no matter how fast the inflatory train starts rolling... 


2. Have you ever read a book on the history of economics in your life? I encourage you to go look at the price ratio between Au and Ag throughout history. The original ratio was set to 1:10 through 1:13 and today it is at 1:55. The point is that everybody and his dog expects Au to hit a min. of 2500 bucks and the underpreciated silver will follow suit. Once your paper "assets" reach their real value (i.e. the value of the paper and ink) and people reintroduce barter, you can damn well expect the gold-silver ratio to go down to at least twice the value it has today.


Go lick your CEO's ass instead of trolling...

Ghordius's picture

Why is everybody assuming that MF is a troll? Your assumption with the historical ratio of 1:10 to 1:12 was in a time where there still were countries that used silver as specie or backed a currency with silver. This is not the case at the moment. Even gold was on the brink of losing it's monetary metal "status" in 1999.

Even traditionally silver-backed countries would shun silver at the moment and would go to gold-backed first. Silver is simply more speculative. It might come back as a monetary metal, yes, but it's not a foregone conclusion. And by then, the next in line would be copper - because monetary metals need a certain degree of market stability that needs a certain amount of unused metal in the first place.

disabledvet's picture

and there is billions of tons of copper...a huge quantity just "lying on the ground in Argentina." Interestingly in spite of Argentina's default "prices have remained quite high." And having stiffed their creditors once didn't they just do it again recently with the Repsol thing?

Ghordius's picture

and Chinese businessmen (even the smaller ones) can get easy credit from the banks if they offer copper as collateral - so lots of them store a ton or two in their basements...

btw, my argument is not for copper becoming soon a monetary metal (again) - more of the problem silver is facing... too little! as MF is writing.

ThirdWorldDude's picture

"Your assumption with the historical ratio of 1:10 to 1:12 was in a time where there still were countries that used silver as specie or backed a currency with silver."


Of course, and that is exactly where we are headed to after this fiat charade crashes. You don't suppose that 5000 years of established ratio between 10:1 (Ancient Egypt) and 15:1 (U.S. Mint Act of 1792) has existed by luck? 


But I digress; when I post about PM's, my starting and ending point is the household economy, not a state-based one. Having had the opportunity to see people robbed of their paper assets Weimar-style, I'd be a fool to make the same mistake again and in my calculations I implement the worst-case scenario. When this paper circus is over, people will eventually go back to a tangible currency (beside barter) and no matter what the state implements, tradition (as stated by Ben the Hamster) will prevail.