Euro-zone exit 'inconceivable'

 

It would be "technically and economically inconceivable" for a country to exit the euro-zone, European Central Bank Governing Council member Ewald Nowotny was quoted as saying this morning.

In comments reported by Austrian magazine Profil he dismissed as "nonsense" suggestions that a country could at least temporarily quit the currency bloc and use devaluation as a way to boost exports.

"The citizens of these countries would immediately start a run on the banks to pull out their savings, which would lead to the immediate collapse of these banks," he said.

Greece has denied a German news report last week that it was considering leaving the euro zone.

However European authorities are bracing themselves for a new Greek bailout as anxiety intensifies over the lack of market confidence in the current €110 billion rescue plan for the country.

Although moves to deepen Europe’s support for Greece are certain to create political trouble for German chancellor Angela Merkel and other leaders, the authorities are adamant there should be no restructuring of its debt.

At issue is whether Greece applies to the European Financial Stability Facility (EFSF) temporary bailout fund for additional aid.

“Markets continue to have doubts and we have scheduled our next steps for 2012,” said Greek finance minister George Papaconstantinou.

Mr Papaconstantinou was present in Luxembourg on Friday night as a select group of finance ministers and officials gathered to discuss the country’s feeble financial situation.

“We will either go out to markets or use the recent decision by the EU Council that allows the European fund to buy Greek bonds. That was what the discussion was about,” he said in reference to the talks.

Any approach to the fund would go well beyond the scope of the current EU-IMF rescue plan for Greece, which operates as a stand-alone credit line outside the EFSF framework.

As such it would require political approval throughout the euro zone, raising the likelihood of a hostile response from the opponents of euro zone bailouts in countries such as Germany and Finland.

The fund’s support programmes do not provide for private sector participation in sovereign rescues.

But EU leaders have resolved to give the EFSF power to buy bonds in primary debt markets, providing an additional layer of support for bailout recipients as they try to return to private debt markets.

Greece’s EU-IMF sponsors are increasingly concerned that the country will not be able to tap market financing next year as planned under its bailout, and this has prompted talks on new measures to prop up its feeble public finances.

In the background is fear of turmoil in the event of restructuring – code for default – and concern to ensure the credibility of an ongoing round of bank stress tests.

With Greece set to dominate a meeting this day week of the 17 euro area finance ministers, it is unclear whether a deal will be possible at that time to cut the interest rate on Ireland’s bailout loans.

The Luxembourg talks were arranged at a recent meeting in Washington of G7 finance ministers.

A senior European source said the ministers wanted to keep the talks “secret” and drew up no contingency plan for any media leak about the gathering.

This prompted confusion for hours on Friday when word of the meeting emerged in a report in Germany’s Der Spiegel which said Greece had raised the possibility of leaving the euro.

A return to the drachma was quickly denied but the euro lost 1.5 per cent of its value against the US dollar amid contradictory messages about the purpose of the talks.

Chaired by euro group president Jean-Claude Juncker, the meeting was attended by the finance ministers of Germany, France, Italy and Spain as well as European Central Bank chief Jean-Claude Trichet and EU economics commissioner Olli Rehn.

Mr Juncker, who said talk of Greece leaving the single currency was “stupid”, said the 17 euro zone ministers will assess next Monday whether a further aid plan is required.

He indicated, however, that the debate is proceeding rapidly in that direction.

“We think that Greece does need a further adjustment programme,”he said.

“We don’t want to have the euro area exploding without reason. We were excluding the restructuring option, which is discussed heavily in certain quarters of the financial markets.”

Greek prime minister George Papandreou characterised as “borderline criminal” talk about Greece leaving the euro zone.

“No such scenario has been discussed even in our unofficial contacts . . . I call upon everyone in Greece and abroad, and especially in the EU, to leave Greece alone to do its job in peace.”

British chancellor George Osborne said Greece had “very difficult questions” to address.

While saying additional assistance from the euro zone might be required, Mr Osborne said Britain’s participation in the Irish bailout was a “special case”. Britain did not wish to take part in any “second bailout” of Greece, he added.