Greek Plan B needs two elements
By Hugo Dixon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — The European Union is finally working on a plan B in the unlikely case that Greece’s parliament votes against austerity later this week. The priority in such a plan should be swift action by the European Central Bank to protect the rest of Europe’s banking system from mayhem. The EU should also try to give Athens a second chance to reflect on its folly.
The most dangerous immediate consequence of a No vote would be an acceleration of deposit flight from Greek banks. This could sow panic in banks in other peripheral nations. One way of stopping that would be for the ECB to immediately make clear that buckets of liquidity are available for non-Greek banks. Ideally, this shouldn’t just be short-term money, but medium-term money too. Euro zone governments should underwrite any losses the ECB incurred on such emergency support.
It would also be nice to stop Greece going into a tailspin. The hope would be that, once the Greek people and politicians witnessed the havoc unleashed by balking at austerity, they might change their minds. It would then be desirable to provide Athens some sort of bridging loan to prevent default before the second vote. The euro zone shouldn’t reward delinquency. But it might still be possible to give money if Athens pawned assets.
It would also be necessary to provide a bridging facility for the Greek banks; otherwise they could collapse before any second vote occurred. It’s hard to see how the ECB could provide it in such a scenario, as Athens would have just stuck two fingers up to Europe. But it could let the Greek central bank offer its banks emergency loans in the same way that the Irish central bank has been doing to its banks. There would, though, have to be limits given that the Greek central bank’s own balance sheet is shot to bits.
Such a plan B might well fail to help Greece. All the more reason for the euro zone to give priority to protecting itself.