Bloomberg News

Central Bankers Discuss Plans to Limit Greek Exit Fallout

May 11, 2012

A Eurobank branch after tit was burned during the February's violent clashes in Athens. Photographer: Louisa Gouliamaki/AFP/Getty Images

A Eurobank branch after tit was burned during the February's violent clashes in Athens. Photographer: Louisa Gouliamaki/AFP/Getty Images

Central bankers across Europe have started discussing the possibility of a Greek exit from the euro area and how to handle the fallout, Swedish Riksbank Deputy Governor Per Jansson said.

“I would be very careful in speculating that it would be a painless process without complications,” Jansson said in an interview in Stockholm today. “Of course at meetings abroad that we are at, the question is discussed. I hope and believe that they will stay in the euro zone.”

Planning for a Greek exit is intensifying after May 6 elections saw anti-bailout parties surge in popularity and left the country in political stalemate. European Central Bank officials decided earlier this year to deal with any Greek exit on an ad-hoc basis rather than devising a templated set of responses because the fallout would be so unpredictable, said three euro region central bank officials. That may change as the Greek crisis worsens, the officials said.

The Frankfurt-based central bank continues to assume Greece will stay within the euro, a spokesperson said today on condition of anonymity, in line with ECB policy.

ECB Executive Board member Joerg Asmussen nevertheless questioned that assumption this week when he warned that it must comply with bailout deals “if it wants to remain a member of the euro zone.”

Currency Swaps

Policy makers outside Europe are also bracing for new turmoil. Philippines central bank Governor Amando Tetangco said today he’s ready to use the necessary tools to fight any bout of contagion unleashed by a worsening euro crisis.

“The possible impact on emerging-market economies, like the Philippines, of talk of the Greek exit continues to be volatility in capital flows that translate into volatility in financial prices,” Tetangco said in an e-mailed response to questions. “We will therefore continue to monitor market behavior and will be ready to use tools in our enhanced tool kit as appropriate.”

The Bank of Japan (8301) pledged today to deploy its foreign- exchange assets as part of any international emergency response to turmoil in markets without linking the statement to Greece. The Reserve Bank of India yesterday ordered exporters to convert half their foreign-currency earnings into rupees to prevent further decline in the exchange rate.

Swap Lines

If Greece did leave the euro, central banks could open currency swap lines to avoid funding problems in major exchange rates, Bank of America Merrill Lynch economists led by Laurence Boone said in a report dated yesterday. There would be a high chance the ECB would cut its key interest rate to 0.5 percent from 1 percent, buy Spanish and Italian debt in unlimited amounts and offer banks more long-term cash, they said.

A post-election poll of 1,253 Bloomberg subscribers found 57 percent expect at least one country to leave the euro area this year, the most since the survey began in 2010 and up from 11 percent in January 2011.

“Speaking for myself, it’s so difficult to see what a Greek exit would mean,” Jansson said. “It would mean both an enormous political pressure on the European cooperation and also large economic risks.”

To contact the reporters on this story: Kim McLaughlin in Stockholm at kmclaughlin6@bloomberg.net; Karl Lester M. Yap in Manila at kyap5@bloomberg.net

To contact the editors responsible for this story: John Fraher at jfraher@bloomberg.net Tasneem Brogger at tbrogger@bloomberg.net


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