The big impact for Ireland of a Greek exit from the euro zone would come in the unquantifiable risk it would create to European economic confidence and growth. However, there are direct costs to the exchequer from Greece either staying or going.
Greece in (Grexin):
If Greece stays in, it will need a new bailout programme. The bulk, or possibly all, of this would come from a fund called the European Stability Mechanism (ESM), the new bailout fund set up in the wake of the crisis. This fund already has €80 billion in its coffers, to which Ireland contributed €1.27 billion, made up of a number of payments over a few years ending in 2014.
There should be enough in the ESM to meet Greek bailout needs, although presumably there would be a call to top up the fund again if it is depleted. So if there is a bailout, Ireland would probably have to put in more funds – possibly the same again – over the next few years.
Two things should be noted. The first is that the ESM money would be advanced to Greece by way of a loan, to be repaid to the fund, albeit over a lengthy period. The second is that while the cash comes from the Irish exchequer, it does not count towards our budget deficit as calculated to meet EU rules each year. Given the significant amount of cash held in the exchequer at the moment, it thus should not have any immediate impact on the annual budget decisions on tax and spending.
Greece out (Grexit):
More speculation is involved in trying to work out what this might mean. A lot would depend on the terms of the Greek exit – in other words, would it crash out of the euro zone and default on most of its liabilities, or would there be some kind of more managed process with some ongoing European or IMF support and a restructuring of its debts involving write-downs, but not complete write-offs?
In any event, the first sum of money that would come into question is the €347 million that Ireland put in to the first Greek bailout in 2010 – we did not contribute to the second bailout in 2012 as we were then in a programme ourselves. A Greek default could mean some or all of this would not be repaid.
The second exposure is via the central banking system and the share of any losses the Central Bank of Ireland would take due to default on the ECB holdings of Greek government bonds. If there was a complete default on these payments, the cost to our Central Bank would be about €340 million, based on the most up-to-date figure, and this would result in turn in less Central Bank profit returned to the exchequer.
There is also the wider question of the liabilities of the Greek central bank to the European central banking system in the normal – or not so normal in Greece’s case – course of business – about €100 billion according to the latest figures. There is no clarity on what would happen to this in the event of a Grexit, or on the real impact of a default, given the unique nature of central bank balance sheets. If any losses did emerge within the European system, our Central Bank would take its share, again hitting its exchequer contribution.
These monetary losses from a Grexit, would, in any event, be a lot smaller than the costs which might emerge if the resulting uncertainty hit economic growth or led to higher borrowing costs for peripheral countries such as Ireland.
In particular, Ireland would be exposed to any increase in the borrowing rates investors demanded to lend us money, although so far the reaction on our sovereign bond market has been quite muted. This is what is really at stake for us as the talking finally comes to a climax.