Honohan discusses Greek exit from euro

Mon, May 14, 2012, 01:00

THE GOVERNOR of the Central bank, Patrick Honohan, and his Belgian counterpart, Luc Coene, have broken ranks with the European Central Bank (ECB) governing council and publicly discussed the possibility of Greece leaving the euro zone.

A Greek exit from the euro could be “technically” managed yet would damage confidence in the monetary union, Mr Honohan told a a conference in the Estonian capital Tallinn this weekend.

A departure by Greece would be “a rather destabilising kind of event” for the rest of the euro area and all sides are working to try to avoid it, Mr Honohan said, adding: “It is not necessarily fatal but it is not attractive”.

Mr Coene made similar comments yesterday in an interview with the Financial Times, saying it “would be possible,” even if not in Europe’s interest, for Greece to leave, and countries should have a democratic right to quit.

Their views appear to diverge from those of ECB president Mario Draghi, who has refused to discuss the possibility of a country exiting the euro, which is not foreseen under European treaties.

The ECB would suffer massive financial losses and damage to its credibility in the event of Greece’s financial collapse: it has spent about €40 billion acquiring Greek government bonds as part of support measures for the country.

However, Mr Coene’s remarks – and those of Mr Honohan – hinted at swirling debate within the ECB’s 23-strong council and suggested that the ECB now realises such an outcome has become distinctly possible.

ECB officials decided earlier this year to deal with any Greek exit on an ad-hoc basis rather than devising a template set of responses because the fallout would be so unpredictable, said three euro region central bank officials.

If Greece’s banks became insolvent as a result of international financial support being withdrawn, the ECB would have no choice but to cut off emergency liquidity, Mr Coene warned. The decision on whether Greece stayed in the euro zone was for politicians, however. “It will be a political issue – where is the balance of solidarity – rather than a technical issue about whether the banks have been sufficiently recapitalised or not.”

He said: “The ideal would be if all member states stayed in the club – that would be the best for everyone, even the Greeks. But, of course, if one member decides it no longer has a shared interest in being a member, you must allow them to get out – that is part of a democratic system.”

In the past ECB policymakers have warned a Greek exit could have disastrous consequences well beyond Greece’s borders.

“Divorce is never smooth,” Mr Coene said. But he went on: “I guess an amicable divorce – if that was ever needed – would be possible, but I would still regret it.”

– (Financial Times/Bloomberg)