Dallara Says Greek Euro Exit May Exceed 1 Trillion Euros
The cost of Greece exiting the euro would be unmanageable and probably exceed the 1 trillion euros ($1.25 trillion) previously estimated by the Institute of International Finance, the groups managing director said.
The Washington-based IIFs projection from earlier this year is a bit dated now and probably on the low side, Charles Dallara said in an interview in Rome yesterday. Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.
The European Central Banks exposure to Greek liabilities is more than twice as big as the ECBs capital, said Dallara, who represented banks in their negotiations with the Greek government on its debt restructuring. As a result, he predicted the bank would be unable to provide liquidity and stabilize the euro-area financial sector.
The ECB will be insolvent if Greece were to exit the euro, Dallara said. Europe would have to first and foremost recapitalize its central bank.
Concern about Europes crisis has erased about $4 trillion from global equity values, as policy makers continue to argue over how to stabilize the 17-nation euro area and limit regional contagion. European Union President Herman Van Rompuy said yesterday that contingency planning for Greece leaving the euro isnt a priority, while Morgan Stanley economist Elga Bartsch has said Greece has a 1-in-3 chance of a euro exit.
In February, the IIF estimated that Greeces liabilities, in the event of a euro exit, could be crippling. It is hard to see how they would not exceed 1 trillion euros, the group said in an internal Feb. 18 report that hasnt been made public.
Spain, Italy and the already-bailed out Ireland and Portugal remain quite vulnerable to changes in market sentiment as Europes sovereign debt crisis continues, Dallara said. He urged policy makers to remember the shockwave caused by the failure of Lehman Brothers Holding Inc., and that what appears to be a containable event may in fact bring on financial meltdown.
For Greece, in its fifth year of recession, it may be more effective to offer extra money to help its battered economy recover, Dallara said. Because Greeces economy has shrunk so much faster than expected, it may need more time to meet its budget targets and repay its international loans, he said.
Greeces shrinking economy could be aided at a cost of an additional 10 billion euros. Were talking about very modest sums compared to whats already on the table, he said.
A small olive branch here carefully defined, nuanced in its presentation, not as an alternative to fundamental reform but a recognition that some elements of this program were not that well designed, would be a wise thing and I would do it sooner rather than later, Dallara said.
Its not clear whether Spain will need a bailout as it seeks to help its banks weather the euro crisis, he said. A planned audit of bank loan books is likely to show that the Spanish banking sectors woes are manageable overall, Dallara predicted.
Spain is grappling with how to handle Bankia SA, which was nationalized earlier this month, and other problems in the savings-bank sector. Dallara said the systemic risk posed by Bankia has been somewhat exaggerated and that independent inquiries will provide an outside assessment of Spains financial condition.
If it is of manageable proportions, then I think it is the decision of the Spanish government to decide whether to pursue outside aid, Dallara said.
The magnitude remains to be determined and I think we should exercise a bit of patience and allow this process to run its course and realize that as it is, Spain is making substantial headway in budget reduction, Dallara said.
In the long run, the euro area will need to address the fundamental structural flaw of sharing a currency while allowing national governments to control fiscal policy, he said. He urged Germany to drop its opposition to shared debt and instead seek a system where joint euro bonds could be an incentive to fiscal restraint and structural reform.
The only way to help markets see past that obscurity is to remove the cloud of uncertainties of national fiscal position and move toward unification, Dallara said.
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