Leaving the eurozone

EU Trade Commissioner Karel de Gucht first admitted in mid-May that the European Central Bank (ECB) as well as the European Commission were at work on contingency plans "in case Greece doesn't make it."

That brought him a quick rebuke from Olli Rehn, the European commissioner for economic affairs.

"Karel de Gucht is responsible for trade. I'm responsible for finance and economic affairs and relations with the ECB. We are not at work on the scenario of a Greek exit," Rehn said.

But others have been more forthcoming.

"If central banks and companies are not preparing for such a scenario, that would be a serious professional error," said Belgium's Deputy Prime Minister Didier Reynders, but he also admitted that "there is no single discussion at the European level about what to do in such a case."

However, an EU task force has recommended to EU governments that they work out national emergency plans for the case of Greece leaving the euro.

News agency Reuters has reported that senior officials within the eurogroup have held telephone conferences within the last six weeks to discuss various measures, but have not reached any concrete conclusions. The suggestions have included instituting controls on capital transactions, temporarily suspending the Schengen agreement, which guarantees freedom to travel in Europe without border checks, as well as limiting ATM withdrawals.

Bank runs ahead?

European banks would seem to be well advised to have enough liquidity for a worst-case scenario. Herbert Stepic, head of Vienna's Raiffeisen Bank International, explained why: "An exit by [Greece] from the eurozone would lead to an intense summer with strong volatility in financial markets and extreme fluctuations on stock exchanges." Banks would mistrust one another even more deeply, and private customers would be worried about their money and might want to withdraw it.

Stepic's bank has set aside around 25 billion euros ($31.25 billion) in liquidity for such a case.

The ECB is likely considering similar scenarios. It will especially want to avoid a credit crunch such as happened after the collapse of Lehman Brothers in 2008. The ECB has on two occasions already lent the eurozone's commercial banks money totaling some one trillion euros. Many experts expected the most recent meeting of the ECB Governing Council on June 6 to result in a third injection of liquidity. This did not come about - probably just so that the bank would still have something in hand in case of an emergency situation.

Businesses fear a credit crunch

But businesses are already preparing for such an emergency. A study by the Roland Berger consultancy found that two thirds of German companies consider a Greek exit from the eurozone to be a sensible move, while half view an exit as probable. Every fifth company has already enacted or planned measures to deal with such an event.

"Many companies that have production sites, customers or credits in Greece must make preparations," said Max Falckenberg, a partner at Roland Berger Strategy Consultants.

What companies fear most is a renewed credit crunch.

"Businesses are afraid that the terms of their loans will get worse," Fleckenberg explained. "Existing credit lines could be limited and new ones might not be approved." Though nearly 70 percent of the polled companies view their liquidity situations as acceptable, they still want to be safe and make themselves less dependant on banks. As such, 94 percent of all those included in the study described internal sources of financing as their most important.

Eager for the end

More and more economists, however, view a Greek exit from the eurozone as having positive effects. An exit would not have major financial effects because the write-offs have already been anticipated, said Thomas Straubhaar, head of the Hamburg Institute of International Economics.

Greece's small size means the consequences of its exit might be more easily managed.

"It would be a horrible end, but it would have the advantage that plans could be made again with more assuredness," he said.

A Greek exit would likely lead to a virtual implosion domestically, and the economic situation would be very difficult for years to come.

"Other countries would see that it's no real solution to leave the currency union," Straubhaar said. "This scenario would have the effect of shocking Portugal, Spain and Italy, making them more willing to reform."

Author: Rolf Wenkel / gsw
Editor: Michael Lawton