Europe and the rest of the world are holding their breaths to see whether Greece will exit the euro zone. According to reports, a euro zone Greek exit may force the European Central Bank (ECB) and its currency bloc of nations to face a bill amounting to billions of Euros. Germany and its partners will once again have to front a large portion of money to keep the euro zone policy afloat. To further complicate things, a Greek exit will place Europe into an unknown legal area. When considering the legalities and the financial burden of the Greek exit, there may be enough incentive by other European nations to keep Greece in the euro zone. However, the final decision to stay or go can only be made by Greece.
Major Loss of ECB Capital
During Greece’s second €130 billion bailout, the country’s private investors had to endure heavy write downs. As a result, it is estimated that the ECB, the International Monetary Fund and the euro zone nations held close to €200 billion of its debt. If a Greek exit were to happen the country would default, causing major financial losses. It’s estimated that the loss could be enough to eliminate the bulk of the ECB’s capital. If a Greek exit had to happen, the ECB would have to recapitalize itself from government coffers. Unfortunately, Europeans governments are not in a very favourable position themselves to offer additional capital.
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Wide Scale Monetary Intervention and Stabilization
In the case of a Greek exit, the refunding of the ECB would not be the only major issue faced by European states. A Greek exit from the euro zone would not stop costs from mounting as nations would attempt to avert a total Greek collapse and further contagion. In other words, a Greek exit will not simply mean that the euro zone crisis will dissipate. The ECB, along with Germany, the European Stability Mechanism (ESM) and the IMF would have to undertake a large scale intervention in order to stabilize the financial system, which could amount to billions of Euros.
The Effects of a Greek Exit on Euro Zone Nations
In essence, the ECB is a joint effort between the seventeen euro zone national central banks. Collectively, the system of central banks has reserves of around €86 billion. Losses caused by a Greek exit would be divided up between nations according to a measure of individual countries’ stakes based on economic and population size. Germany would be burdened with the largest portion, some 27%, followed by France. It is likely that in relative terms, countries with smaller and less robust economies would be hit harder by a Greek exit.
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