Who Will End Up Paying For A Greek Default?

Spain's Economy Minister Luis de Guindos gestures during a news conference at the economy ministry in Madrid, Spain, July 6, 2015. De Guindos on Monday said the euro currency was irreversible and Greece should remain part of it even after the Greeks rejected the conditions of a new rescue package on Sunday. Andrea Comas/Reuters
Council on Foreign Relations

In March 2010, two months before the announcement of the first Greek bailout, European banks had €134 billion [$148 billion] worth of claims on Greece. French banks, as shown in the right-hand figure in the chart, had by far the largest exposure: €52 billion [$57 billion]—this was 1.6 times that of Germany, eleven times that of Italy and sixty-two times that of Spain.

The €110 billion [$121 billion] of loans provided to Greece by the IMF and Eurozone in May 2010 enabled Greece to avoid default on its obligations to these banks. In the absence of such loans, France would have been forced into a massive bailout of its banking system.

Instead, French banks were able virtually to eliminate their exposure to Greece by selling bonds, allowing bonds to mature and taking partial write-offs in 2012. The bailout effectively mutualized much of their exposure within the Eurozone.

The impact of this backdoor bailout of French banks is being felt now, with Greece on the precipice of an historic default. Whereas in March 2010 about 40 percent of total European lending to Greece was via French banks, today only 0.6 percent is. Governments have filled the breach, but not in proportion to their banks' exposure in 2010. Rather, it is in proportion to their paid-up capital at the European Central Bank —which in France's case is only 20 percent.

In consequence, France has actually managed to reduce its total Greek exposure—sovereign and bank—by €8 billion [$9 billion], as seen in the main figure in the chart. In contrast, Italy, which had virtually no exposure to Greece in 2010 now has a massive one: €39 billion [$43 billion]. Total German exposure is up by a similar amount—€35 billion [$39 billion]. Spain has also seen its exposure rocket from nearly nothing in 2009 to €25 billion [$28 billion] today.

In short, France has managed to use the Greek bailout to offload €8 billion [$9 billion] in junk debt onto its neighbors and burden them with tens of billions more in debt they could have avoided had Greece simply been allowed to default in 2010. The upshot is that Italy and Spain are much closer to financial crisis today than they should be.

Benn Steil is Senior Fellow and Director of International Economics and Dinah Walker is an analyst at the Council on Foreign Relations, on whose site this article first appeared.