International Monetary Fund Managing Director Christine Lagarde said a Greek exit from the euro area would be “extremely expensive” and hard.
Still, the IMF has to be “technically prepared for anything because it’s our job,” she said in an interview with Dutch public television broadcast today. “I’m not suggesting that this is a desirable solution. I’m just saying that this is within the range of multiple options, one that we have to technically look at.”
A Greek caretaker government will prepare new elections probably on June 17 that are shaping up as a ballot on whether the country should remain a euro member, following inconclusive May 6 voting that pushed a political party opposed to Greece’s international bailout into second place. The IMF co-financed two bailout packages to the Mediterranean nation.
To stay within the euro region requires efforts to “abide by the program which has been put into place” as conditions attached to the latest loan package, Lagarde said. She said a euro exit wouldn’t reflect the will of the Greek people.
“No country is immune from hardship happening anywhere,” Lagarde said. “Within the euro zone, a currency union, what happens to any member is going to affect others.”
Her comments echo concern by World Bank President Robert Zoellick that a Greek exit from the euro could have ripple effects reminiscent of 2008, when Lehman Brothers Holdings Inc.’s collapse was followed by a global financial crisis.
“The core question will actually not be Greece, it’s Spain and Italy” just as they try to overhaul their economies, Zoellick, whose term in office ends June 30, said at an event organized by the Economic Club of Washington today.
“Where the danger comes in is when events come and they start to affect confidence and you get illiquidity moments” that can lead banks or companies to tumble, he said.
In its World Economic Outlook published in April, the IMF cited the “disorderly default and exit” by a euro country among “tail risks” to global growth.
“If such an event occurs, it is possible that other euro area economies perceived to have similar risk characteristics would come under severe pressure as well, with a full-blown panic in financial markets and depositor flight from several banking systems,” according to the report. “Under these circumstances, a breakup of the euro area could not be ruled out.”
To contact the reporter on this story: Sandrine Rastello in Washington at firstname.lastname@example.org
To contact the editor responsible for this story: Chris Wellisz at email@example.com