Sunday, May 13, 2012

Can Greece leave the Eurozone?

Countries in the Eurozone have the democratic right to leave, even if it is not in the larger interest of Europe.  A Greek exit from the Eurozone is therefore “possible”. This was recently stated by Luc Coene, European Central Bank’s (ECB) governing council member. On the other hand, Mario Draghi, president of the ECB has refused to comment on the possibility of Greece leaving the euro. The economic repercussions, he believes, would be far worse than anyone can imagine. The bank has already spent approximately $51bn in purchasing its bonds to support the country.

Earlier this year, the central bank had announced that it had no specific plan or set of plans in case if Greece decides to exit the Eurozone. The fallout in that case would be so unpredictable that it is not possible to plan ahead; rather the ECB would deal with the situation on ad-hoc basis. 

Coene, the central bank governor of Belgium has expressed frustration over Athens’s inconclusive elections as euro fell to three month lowest against dollar on Thursday (10th May). The ECB has demanded economic reforms from Greece in return for bailout but the current indecisive result creates more problems. President Karolos Papoulias is holding meetings with all other party heads to form a successful unity government.
Mr Coene believes that in case of decrease or absence of international financial support, ECB would be forced to end the emergency liquidity and therefore Greece’s banks might become bankrupt. Some economists have argued that ECB would continue to support Greek banks even if there wasn’t any international support. On the contrary, ECB officials have stated that the ECB liquidity funding would automatically stop if a Greek bank were to go insolvent.

He suggested that the ECB sponsored “firewalls” will be able to sustain any short term damages arising out of the “divorce”. 

Patrick Honohan, another ECB governing council member believes that a Greek exit can be “managed” but it would be extremely damaging for the reputation of ECB. 

Almost all the senior ECB officials have, at one time or another, publicly expressed that they are in favour of Greece keeping itself a part of the union. In the long run, this will be beneficial for both, Greece and Europe. Mr Coene believes that whether or not Greece will remain or exit the euro was a political question which needs to be answered by politicians, not bankers. He is quoted as saying, “Divorce is never smooth …… an amicable divorce -- if that was ever needed -- would be possible but I would still regret it."

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Your comments and feedback are always appreciated.

Sarfaraz A.K.