This week 11.3 million European citizens will discover that their Euro’s have disappeared overnight as a part of Europe’s Banking system collapse. Not only private banks in Greece are unable to cope with the situation but also a part of the European System of Central Banks has stopped functioning.
The fallout will not be restricted to direct loses but also include indirect loses due to political upheaval.
The Greek debt of around 370 Billion Euro’s is primarily held by institutions as the IMF (10%), Euro-Area Governments (62%) and (8%) by the ECB.
16% is probably held by private investors like Japonic Partners and Paulson & Co.
The direct loses of banks outside of Greece are limited, however the indirect damage will be tremendous. Investors and bankers will discover that the public and political support for the European Financial Stability Facility (EFSF) has been evaporate.
The indirect fallout will be immense and could trigger a worldwide financial and political crisis.
The stability of the Euro, just like all major currencies, is based on the credibility of the countries issuing the Euro. Generally this is a combination of the country’s treasury and their Central Banks, in other words it depends on the combination of the political and banking elite. For the Euro it are the ECB and the funds provided by the European nation’s taxpayers, in this case the EFSF, that provide the stability.
The EFSF is brought to the European public as a fund to support countries within the EMU. The fund is financially supported by the European taxpayer, this fact has caused a lot of debate in numerous European Capitals.
The promise that Greece will repay its debt obligations to the EFSF is done by countless politicians. The political willingness to rescue a country with European tax money is shaky, Euro skeptics are preying on the losses countries will suffer in EFSF because of Greece’s collapse. Supporting a next bailout program will become tantamount to political suicide.
Financial support and bailouts of countries such as Spain will be hard to deliver. The stability of the Euro and the EMU has become the domain of political populism and that is a horrible basis to gain the trust of investors.
The lack of a solid political framework to support the currency and the erosion of trust in the Euro could accelerate, when 11 million Europeans see their Euro holdings evaporate overnight.
If the forthcoming crisis hits the same level that Leehman did, Europe will take unprecedented measurements to harmonize the fiscal policies. They might even use the situation to transfer nations’ power to Brussels.
Internet Sources
Possible Setback for Bailout Plans: German Constitutional Court Halts Special Euro Panel Source Spiegel 3 March 2011
Germany’s Federal Constitutional Court on Friday expressed doubts about the legality of a new panel of lawmakers set up by the German parliament to reach quick decisions on the release of funds from the euro bailout mechanism, the European Financial Stability Facility (EFSF). The court issued a temporary injunction banning the nine-person committee in the Bundestag from taking any decisions on the EFSF’s deployment of German taxpayer money.
German MPs vote for new powers to tackle euro crisis Source 29 September 2011
Ms Merkel had tried to assure her coalition that taxpayers’ money would not be wasted by supporting bailout measures, but could not rule out that the money might be written off if, as financial markets increasingly fear, Greece defaults.
Greek exit from the Euro could cost French taxpayers 66.4bn Euros, says report Source Merco Press 15 May 2012
Eric Dor, head of research at the IESEG School of Management in Lille, said in the report that the departure of the debt-stricken Mediterranean state would result in at least partial losses on its liabilities to the other member states of the 17-nation bloc.
Finland Contests Seniority Clause in Spain’s Bank Bailout Source Bloomberg 5 July 2012
Finland is contesting the wording of an agreement struck last week in Brussels, arguing it doesn’t adequately address the possibility that loans to Spain from Europe’s permanent rescue fund can give taxpayers seniority.
Dispute between bailout countries like Ireland and AAA group emerges Source Independent26-September 2012
Another official insisted that the German-Finnish-Dutch statement did not reopen or undo what was agreed in June, going on to explain:
“Everybody understands that losses incurred some time ago will definitely not be borne by the European taxpayer in the form of a contingent liability.”
Who Hurts Most if Greece Defaults Source Bloomberg February 2015
Greek Debt Vastly Overstated, Investor Tells the World Source The New York Times 20 February 2015
High in a Morgan Stanley office tower, Paul B. Kazarian, one of the largest holders of Greek government bonds, was recently trying to persuade a room full of investors that Greece’s debt load of 318 billion euros was actually a tenth that size.
