Cantillon: Grexit and thoughts of contagion

The news from Greece is grim. As frantic efforts continue to coax the country’s reluctant government back into talks with sceptical creditors, thoughts turn to the containment of contagion in the event that “Grexit” actually happens.

The menu of possible interventions is quite diverse, although the greater burden of the effort would fall on the European Central Bank.

Global financial analysts UBS foresee as many as eight separate actions at the level of the ECB and other bodies to counter any “substantial” turbulence stemming from Greece.

In the immediate sense, UBS expects the ECB to support bank liquidity by easing collateral requirement and making clear that it is in full-allotment mode. It also suggests the ECB would provide “unconditional” longer-term borrowing facilities for banks.

This would mark a turn away from support granted under the targeted longer-term refinancing operations (TLTRO) scheme, which is conditional on greater lending by beneficiary banks.

The ECB would also be expected to remind the market that outright monetary transactions (OMT) – the scheme in which Frankfurt would buy the bonds of a stricken country in unlimited quantities – remain available upon request.

The US Fed and other central banks might also provide swap lines to ease any foreign exchange funding shortages.

Longer term, UBS analysts point to the potential to adjust quantitative easing bond purchases with front-loading and a possible deviation from the ECB capital key. The analysts acknowledge this is “potentially controversial” but it’s the same really for most elements in the armoury.

The deployment of OMT programmes in real time would not be straightforward, nor would a statement by EU leaders that they stand ready to increase the size of the European Stability Mechanism fund.

Ditto any discussion on a pan-European system of deposit guarantees. Almost three years have passed since Mario Draghi promised that the ECB would do “whatever it takes” to save the euro. All that followed has pushed the German faction in the bank to the limit but it may yet be pushed further still.