Greece’s exit will be costly
The cost of Greece exiting the euro would be unmanageable and probably exceed the ¤1trillion previously estimated by the Institute of International Finance (IIF), its MD said last week.
The Washington-based IIF’S projection from earlier this year is “a bit dated now” and “probably on the low side”, Charles Dallara said on Saturday. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”
The European Central Bank’s (ECB’S) exposure to Greek liabilities is more than twice as big as the ECB’S capital, said Mr Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. He predicted the bank would be unable to provide liquidity and stabilise the euro-area financial sector.
“The ECB will be insolvent” if Greece were to exit the euro, Mr Dallara said. “Europe would have to first and foremost recapitalise its central bank.”
Concern about Europe’s crisis has erased about $4-trillion from global equity values, as policy makers continue to argue over how to stabilise the 17-nation euro area and limit regional contagion.
European Union Council president Herman Van Rompuy said on Friday that contingency planning for Greece leaving the euro “isn’t a priority”, while Morgan Stanley economist Elga Bartsch has said Greece has a 1-in-3 chance of a euro exit. In February, the IIF estimated that Greece’s liabilities, in the event of a euro exit, could be crippling. “It is hard to see how they would not exceed €1-trillion,” the group said in an internal February 18 report that has not been made public.
Spain, Italy and the already bailed out Ireland and Portugal “remain quite vulnerable to changes in market sentiment” as the sovereign debt crisis continues, Mr Dallara said. He urged policy makers to remember the shock wave caused by the failure of Lehman Brothers, and that what seems to be a “containable event” may bring on financial meltdown.
For Greece, in its fifth year of recession, it may be more effective to offer extra money to help its economy recover, Mr Dallara said. Because Greece’s economy has shrunk so much faster than expected, it may need more time to meet its budget targets and repay its international loans, he said.
Greece’s shrinking economy could be aided “at a cost” of another ¤10bn. “We’re talking about very modest sums compared to what’s already on the table.”