The European Central Bank and the 17 central banks of nations sharing the euro have about 130 billion euros ($183 billion) of risk from Greek debt in the event of a restructuring or default, Pacific Investment Management Co.’s fund manager Andrew Bosomworth estimated.
“A default is not a desire, but it’s something that might be inevitable” for Greece, Bosomworth, Pimco’s head of portfolio management in Munich, told journalists in Paris today.
In case of a default, the Greek central bank wouldn’t be able to recapitalize the country’s lenders, which have borrowed about 80 billion euros from the central banks that compose the Eurosystem, Bosomworth said. As a result, Germany, France and the other euro-region governments may need to recapitalize their central banks, he said.
ECB leaders and European Union policy makers are clashing over how to prevent the currency region’s first default, after 256 billion euros in bailouts to Greece, Ireland and Portugal failed to stop contagion from the debt crisis. ECB Governing Council member Christian Noyer yesterday ruled out a restructuring of Greece’s debt, calling it a “horror story.”
A year after its 110 billion-euro rescue, Greece remains shut out of financial markets and the cost of insuring its debt against default is near a record high.
While a debt restructuring would “buy time,” alternative solutions to a default are debt transfers to Germany and other countries or Greece selling real-estate assets to reduce debt, Bosomworth said. Transfers with other governments taking on Greek sovereign debt are “not so likely” and would mean “debt forgiveness essentially, as Germany received” from the allies after World War II, Bosomworth said.
Unlike Greek banks, large European lenders such as BNP Paribas SA would have to use their earnings to weather potential losses from Greek debt holdings, Bosomworth said.