ECB’s Honohan Says Greece Euro Exit Can Be Managed

Irish Central Bank Governor Patrick Honohan
Patrick Honohan, governor of the Irish Central Bank. Photographer: Aidan Crawley/Bloomberg

A Greek exit from the euro could be “technically” managed yet would damage confidence in the monetary union, said European Central Bank Governing Council member Patrick Honohan.

A departure by Greece would be “a rather destabilizing kind of event” for the rest of the euro area and all sides are working to try to avoid it, Honohan told a conference in the Estonian capital, Tallinn, today. “It is not necessarily fatal, but it is not attractive.”

The euro fell to a more than three-month low against the dollar yesterday as Greek politicians struggled to form a government following an inconclusive election on May 6 that saw a surge in support for anti-austerity parties. President Karolos Papoulias will meet tomorrow at 12:00 Athens time with the leaders of all parties in an attempt to form a unity government and avoid another vote as soon as next month.

Central bankers across Europe have started discussing the possibility of a Greek exit from the euro area and how to handle the fallout, Swedish Riksbank Deputy Governor Per Jansson said yesterday. ECB officials decided earlier this year to deal with any Greek exit on an ad-hoc basis rather than devising a templated set of responses because the fallout would be so unpredictable, said three euro region central bank officials.

Europe ‘More Resilient’

Europe is “certainly more resilient” to a possible Greek exit than it was two years ago, when the bloc would have been “massively underprepared,” European Union Economic and Monetary commissioner Olli Rehn said at the same conference.

“I still believe that Greece can stay in the euro and find the way to make sure that it respects its commitments,” Rehn said. “It would be much worse for Greece and Greek citizens, especially for the less well-off Greek citizens, if Greece did leave the euro than for Europe as such. Europe also would suffer, but Greece would suffer more.”

The Greek President will first have discussions with the leaders of New Democracy, Syriza and the Pasok parties, who each have had mandates to form governments in the past week. He will then meet the leaders of the four other parties elected to parliament, Papoulias’s office said in an e-mailed statement today.

‘Democratic Decision’

Europe’s more than two-year-old debt crisis was reignited this month after voters in Greece and France backed candidates opposed to austerity measures masterminded in Germany by Chancellor Angela Merkel. In France, President-elect Francois Hollande has pledged to raise taxes and increase spending to support economic growth.

Alexis Tsipras, leader of Syriza, the biggest anti-bailout party in Greece, refused to join a unity government, claiming the people have rejected a bailout, the second since May 2010.

ECB council member Panicos Demetriades today criticized austerity and called for growth-oriented policies in his inaugural speech as the new central bank governor of Cyprus.

“Both in Cyprus and in the euro area, it is now becoming understood that an austerity policy alone is not enough to put countries’ budgets back on a sound footing,” Demetriades said, according to a text of his speech in Nicosia today. “Growth is needed above all else.”

Cypriot banks are reeling from losses on their holdings of Greek debt and the government is unable to borrow on financial markets. Its economy, the euro area’s third-smallest, will shrink 0.8 percent this year, the European Commission said yesterday.

Further financial support for Greece can be considered if the country sticks to its promises, ECB council member Jens Weidmann said, according to Sueddeutsche Zeitung.

“If Greece isn’t keeping its word then it is a democratic decision,” Weidmann, who also heads Germany’s Bundesbank, is quoted as saying in an interview. “Consequently, it misses the basis for further financial support.”

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