Thursday 12 December 2019

Debt crisis: EU working on plan for Greek euro exit reporters

THE EU is working on an emergency plan for a Greek euro exit, a key economic commissioner admitted for the first time today.

Karel De Gucht, a former Belgian foreign minister before he became EU trade commissioner, said that the EU is ready to handle the "cataclysm" of Greek exit without a "domino effect" - despite the financial turmoil engulfing Spain.

”How much will it cost… I do not know, but it will cost money. What I am assured of is that there will be no contagion: a Greek exit does not mean the end of the euro,” Mr De Gucht said.

Painting a grim picture the commissioner said that if Greece left the euro it was “finished” and that, while the euro would survive it would have to fight off a “cataclysm”.

”C'est fini. It [Greek exit] means that after a while you can no longer pay your officials who can no longer pay your pensions,” he said.

”All you can do is have your central bank to print money, and then you get hyperinflation. That would cause a cataclysm in other countries that are now under pressure.”

Citibank fears contagion a lot more than a Greek exit from the eurozone: “We believe that Grexit, in isolation, would be manageable for European banks. Grexit, with 50pc to 75pc probability, could impact exposures to Greece of up to around €410bn. However, we estimate most of these exposures (up to around €360bn or 87pc) belong to the official sector.

“We calculate the remainder is attributable to the private sector: up to €15bn for CASA, SocGen, Bank of Cyprus and Cyprus Popular which have subsidiary or branch exposures to Greece; up to c.€5bn for Greek banks; up to around €20bn to other European banks; and up to €15bn to other investors,” it said..

"Contagion Risks Are Trickier - In the run-up to potential Grexit, all eyes would likely be focused on the contagion risks to Ireland, Italy, Spain and Portugal (IIPS). With sufficient fiscal resources and an accommodating ECB, contagion to Italy and Spain should be manageable. We estimate the ECB would need to deploy up to an additional €800bn in liquidity to support potential deposit outflows and debt refinancing for the IIPS banks – the equivalent of a one LTRO and a half. ECB’s assets could rise to around 41pc of EA GDP versus 33pc today.

De La Rue has drawn up contingency plans to print drachma banknotes should Greece exit the euro and approach the British money printer, an industry source has told Reuters.

The German finance ministry said it has a responsibility to be prepared for any eventuality in the eurozone. It added that it believes Spain can deal with its bank problems.

Angela Merkel will come under pressure at the G8 summit this weekend to use German taxpayers’ money to help rescue struggling European countries, including Greece and Spain, by underwriting their debts.

The German chancellor will travel to Washington for a key G8 summit with other world leaders, including the British Prime Minister, David Cameron and Barack Obama, as fears mount that the euro is on the brink of collapsing.

German two, five, 10 and 30-year yields hit record lows this morning as European markets opened down. Asian markets recorded heavy losses following a sell off on Wall Street in the wake of Fitch’s warning of mass eurozone downgrades.

However, there was a big turnaround in Spanish banking shares. Bankia leapt up 31.1pc while number-one bank Santander surged 3.5pc and BBVA advanced 4.2pc.

The IBEX was up 0.5pc by mid morning after falling 2.3pc on opening.

Inigo Fernadez de Mesa, a junior minister at the Spanish treasury, told BBC Radio 4's Today programme that there is "no liquidity problem" in his country:

However, the Spanish central bank has said the country's bad loans have hit their highest level since 1994. While Bank of Spain deposits fell 4.2pc in March from the same period in 2011, the country's bad loans rate increased to 8.37pc from 8.3pc in February.

Greece's European partners took too long to help the country and the goal must now be to spur economic growth as well as cutting the debts of the eurozone country, French Prime Minister Jean-Marc Ayrault said.

“Greece needs to revive its economy. There are unused [EU] structural funds and what's needed now is help to secure that revival alongside putting its accounts back in shape. We waited too long before helping Greece. This has been going on for two years now and only gets worse.”

British Prime Minister David Cameron said today that the euro-region crisis could get “a lot worse” unless decisive action is taken.

“These are very difficult economic times and what’s happening in the eurozone is truly worrying,” Mr Cameron said in an interview with ITV television’s Daybreak.

He said more needed to be done “to persuade eurozone countries to take really decisive action” to deal with their problems rather than “kicking the can down the road”.

He added that his deficit-reduction plans are supporting economic growth, not harming it, and are no more demanding than those of newly elected French President Francois Hollande.

“I listen to all the criticism, I’m not living in some cut-off world, but the fundamental judgment is you need a plan to get on top of your debt and deficit to keep the economy growing.”

Yesterday Mr Cameron heaped pressure on Mrs Merkel with a plan to save the single currency to stop Europe’s financial problems spiraling out of control.

He recommended the issue of so-called Eurobonds, which would effectively mean that debts incurred by one country in the single currency are shared throughout the eurozone. This involves German taxpayers underwriting debts throughout the Continent.

Mrs Merkel is opposed to the bonds and the move is deeply unpopular in Germany.

A top member of her junior coalition partners said today that the eurozone could cope with a Greek exit from the bloc.

Former economic minister Rainer Bruederle told German business daily Handelsblat: “Unlike two years ago, the eurozone today could cope with a Greek exit. It would cost a lot of money but it would be manageable. The decision, however, lies in Athens and not in Berlin. The Greeks themselves have to weigh up whether reintroducing the drachma would help their economic recovery more than staying in the eurozone

Alexis Tsipras, head of the Greek Coalition of the Radical Left, has told the Wall Street Journal that he sees little chance Europe will cut off funding to his country but that if it does, Athens will stop paying its debts.

“Our first choice is to convince our European partners that, in their own interest, financing must not be stopped... If they proceed with unilateral action on their side, in other words they cut off our funding, then we will be forced to stop paying our creditors, to go to a suspension in payments to our creditors.”

Also in Business