EU needs contingency plan to handle Greek blow-up

By Hugo Dixon
February 7, 2012

By Hugo Dixon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The euro zone needs a contingency plan to handle a potential Greek blow-up. The latest game of brinkmanship being played in Athens will probably end in a fudge – that’s how such games normally resolve themselves. But if it doesn’t, Greece’s banks will go bust and the rest of the euro zone will need a plan to prevent a panic in its own banking industry.

The hardliners in Europe, led by Germany, have virtually lost patience because of the Greek government’s inability to deliver on its promises. The fact that the next tranche of bailout cash is supposed to be a super-sized 80-90 billion euros seems to have made the lenders even more determined to secure reforms to make the economy more competitive. This is serious money, after all. The Greek politicians, meanwhile, are reluctant to force the voters to drink any more unpleasant medicine – especially given that there could be a general election in April.

But is the rest of Europe really prepared to pull the plug? Doing so wouldn’t just mean that the Greek government would go bust, as it would be unable to pay a bond that comes due in March. It would also mean that the country’s banks, which are stuffed with their government’s debt, would go belly up.

If the Greeks were the only ones who would suffer from such a catastrophic bankruptcy, their partners could afford to hang tough.But such a scenario would probably provoke runs on banks in the rest of the euro zone – especially weak economies such as Portugal, Ireland, Spain and Italy. The European Central Bank would, again, have to ride to the rescue by flooding the system with liquidity.

Helping banks deal with an all-out panic wouldn’t be easy. After all, the ECB is only supposed to provide liquidity in return for adequate collateral. And, in some cases, banks have run out of such eligible assets. This is why the ECB has already authorised national central banks to provide so-called emergency liquidity assistance to their country’s banks in return for lower quality collateral.

But in a panic even this ELA support might run out. Then the ECB would need to get more creative. One option would be to let banks issue bonds guaranteed by their own governments and pledge those to their national central banks in return for cash. While that might bail out the banks, it would heap further contingent liabilities on their governments – potentially gumming up the sovereign bond markets, which would already have been savaged by a Greek default. So some sort of programme to shore up the weak governments, presumably by accessing the war-chests that the euro zone and International Monetary Fund are assembling, would also be needed.

Such a plan may never need to be used. But if it doesn’t exist and the brinkmanship in Athens doesn’t have a satisfactory conclusion, the euro zone will find itself in a deep chasm.

Comments

Why is anyone worried about the Greeks delivering on austerity promises? They cut a whole Billion (yeah ONE!)euros from last year’s budget. That’s a whole 1/90th of the next tranche. Germany should say, “What — me worry?”

Posted by 1OldSchool | Report as abusive
 

No matter what the Greeks say now, they can change their mind later. They did some heavy backsliding in the past under much less pressure. As the Troika’s requirements ramp up even higher, does anyone really believe that they won’t backslide again?

If there were two tables of Texas Hold ‘Em poker with the Greek negotiators seated at one table and the Eurozone heads seated at the other, I would relish the opportunity to play against the Eurozone heads. I would under no circumstances sit down with the Greeks.

The question the Troika should be asking itself is this: will we be in a better position to withstand a Greek default later than we are right now?

The simple answer is no. I know there are other complex developments behind the scenes, but there will always be other considerations. That fact won’t change.

Each time the Troika and northern Europe put more money into the pot, their position at the table weakens. It weakens further still as time passes and economic problems take their toll in other Eurozone countries.

If the Troika and northern Europe does not fold their hand right now, instead choosing to call the Greeks’ 14.5 billion Euros bet, then the Greeks will bet another 90 billion Euros with the next round. If the rest of Europe calls the 90 billion bet, the game doesn’t end there. Surely, the Eurozone realizes that by now.

The Greeks have everything to gain and nothing to lose unless the rest of Europe folds their hand.

Ah, hubris. As they say at every poker table in America, “you gotta know when to fold ‘em”.

Posted by breezinthru | Report as abusive
 

The ECB and the Euro Central Banks will find it very difficult to deal with a panic.

Maybe the other Euro Nations should take a lead from the Greece Police Union and issue arrest warrants for the leaders of the banks.

Posted by Harry079 | Report as abusive
 

I will try to state briefly my opinion on Greek crisis and on Europoean crisis. Since the 80′s Greece has been fed with more and more money by Europeans and Americans and the only thing that was produced is more and more corruption of the country in all levels. Of course we have to blame ourselves first, but you couldn’t convince even a 5 year old that our lenders did not know anything about our situation, so it is obvious that our corruption was profitable for them. And now our lenders are stuck with an empty country, empty of means and empty of words. They do not trust anyone here and they know very well why. So, either they will let us just drop and shake the dust off their suites or they must propose some certain development measures, managed by them and that is fair, and find a way to monitor the reforms needed step by step, but in a time schedule that does not kill people. Now about Europe. It is now so obvious that French, Germans and others try to maintain the Union whereas English, the big funds and others are trying to break Europe down as they always try to do. You can see some analysts on finance sites almost ready to open a champagne for the destruction of the Union. One of them said : the dance has already started, meaning that, after Greece other countries will also exit until there is nothing left hopefully. So it is time for the ones who want the Union and have the power to keep it alive, to state clearly that we must help each other to that direction and regard the other nations’ problems as our problems. The time is NOW.

Posted by dimitriosz | Report as abusive
 

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