Wednesday, July 8, 2015

How Much Does Greece Owe? The Omission of Tier2 Liabilities

Statistics about Greek debt are hard to interpret, and different news outlets give different figures which are hard to reproduce. For what it’s worth, here are some statistics I have found.
According to a Greek news source (To BHMA), the Greek public debt was 312.7 billion euros at the end of March. Bloomberg reported in February that the Greek government owed 315.5 billion euros. Reuters reported at the end of June that Greece owed its official creditors 242.8 billion euros. This figure excludes what is owed to private sector creditors. It is also difficult to reconcile the other statistics in the article with this total amount.
However, what all these figures exclude are the liabilities of the Bank of Greece, which would likely not be paid if Greece were to exit the euro. Intra-European system liabilities reported on the May 2015 Bank of Greece balance sheet total 118.1 billion euros. Of this, 17.8 billion is related to physical euro currency and 100.3 billion has to do with cross-border payment transactions through the Tier2 system which connect national central banks of the Eurozone with each other. If Greece were to leave the euro, the European Central Bank would likely have to eat these losses. The Tier2 amounts owed by central banks to the ECB are not secured by collateral. The losses would be shared among the national central banks of the Eurozone.
While it is unclear how much the Bundesbank would be hit, Reuters reports that the head of the Bundesbank has told the German government about potential losses greater than the 14.4 billion euros the bank has set aside to cover losses due to the Greek crisis. These losses would flow through to the government’s budget. The German government, as other governments in the Eurozone, receives government earnings from its central banks. The profits would be less in the event of a Greek exit from the euro. The losses due to Tier2 liabilities would likely be an addition to losses due to bond defaults.
I first became aware of this issue when I read a Wall Street Journal blog item. As the blog indicates, we will likely be hearing more about this if Greece and the troika do not come to an agreement soon. While the Eurozone countries can bear the losses of a Greek exit, the messy and potentially costly central bank issues have to be a consideration.

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