Europe's Missing Contingency Plan as Greek Exit Fears Rise

by Simon Nixon

Wall Street Journal
May 16, 2012

For the last two years, euro-zone policy makers have insisted a break-up of the single currency is unthinkable. Now it is not only thinkable but a real possibility: Unless Greeks vote for a government willing and able to abide by its commitments, the euro zone will cease to provide bailout funds, setting in train a course of events sure to lead to an exit. Some senior euro-zone policy makers now fully expect this outcome. Many were reluctant to provide Greece with its second bailout package; there appears to be little appetite to negotiate a third.

The challenge now is to ensure a Greek exit doesn't lead to the entire single currency falling apart with unknowable but potentially cataclysmic consequences. Worryingly, very little contingency planning has taken place, some senior policy makers privately concede. Yet the bold action required to contain the contagion likely to engulf Spain and Italy will have such far-reaching consequences for relations between member states that they can hardly be taken in the heat of the moment.

Nobody believes the current bailout funds—capped at €700 billion ($891.1 billion)—are anywhere near big enough to impress the markets, so the decisive crisis response will fall upon the European Central Bank. To head off a possible run on peripheral European banks, it would need to offer to provide unlimited liquidity—and since many banks are already short of eligible collateral, it would have to do so with very little security. That will expose the ECB—and by extension, European taxpayers—to credit risk.

More