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Friday, May 25, 2012 4:56 PM


"ECB Will be Insolvent and Costs May Exceed 1 Trillion Euros" Says IIF Director; If the ECB Prints, Would Germany Exit the Euro?


According to IIF director Charles Dallara in a Bloomberg interview, "ECB will be insolvent if Greece were to exit the euro. Europe would have to first and foremost recapitalize its central bank."

Excuse me for asking but how would they attempt to do that? Print Euros?

Please consider 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 group’s managing director said.

The Washington-based IIF’s projection from earlier this year is “a bit dated now” and “probably on the low side,” Charles Dallara said in an interview in Rome today. “Those who think that Europe, and more broadly the global economy, are really prepared for a Greek exit should think again.”

The European Central Bank’s exposure to Greek liabilities is more than twice as big as the ECB’s 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.”

In February, the IIF estimated that Greece’s 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 hasn’t been made public.

It’s not clear whether Spain will need a bailout as it seeks to help its banks weather the euro crisis, he said.

“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.
Suspect Thinking or Purposeful Fear-mongering?

Since it is perfectly clear that Spain is an untenable situation, and since it is equally clear that unification is not going to happen and would not solve numerous problems, one has to wonder about the rest of his analysis as well.

However, Dallara's statements regarding ECB exposure to Greek liabilities rings true, so let's assume the trillion+ euro figure is correct.

Just where is Europe to get that?

Greece Exit Manageable?

One needs to balance Dallara's statements with statements from Germany that a Greece exit is manageable. For example The Telegraph reports Bundesbank says Greek euro exit would be 'manageable'
The impact of a Greek exit from the eurozone would be substantial but "manageable", Germany's Bundesbank said, raising pressure on Athens to keep its painful economic reforms on track.

Echoing German political leaders, the Bundesbank warned against Europe easing the conditions for Greece to access aid.

"Attempting to kick-start the economy in the short term and putting off consolidation efforts in the long term are not conducive to regaining lost confidence."
Counterbluff?

Bloomberg reports Greek Euro Exit ‘Manageable’ for Markets, BdB German Banks Say
A German banking association that represents Deutsche Bank AG (DBK), Commerzbank AG (CBK) and more than 200 other lenders said investors are prepared should Greece leave the euro area.

“It would be manageable for markets,” Andreas Schmitz, president of the BdB Association of German Banks told reporters in Frankfurt yesterday. “The risks have largely been priced in. A Greek exit would bring lower risks than two years ago but is not to be underestimated.”
Priced In? Who is Bluffing Whom?

The question is: who is bluffing whom or do they all believe these contradictory statements?

In response to What if Tsipras is Not Bluffing? Who Holds the Upper hand? What is Troika's Biggest Fear? Can Greece Possibly Stay in the Eurozone After Default? my friend Pater Tenebrarum pinged me via email with this set of statements.

Whether they are or are not right about this, the Germans now believe that the euro area can survive a Greek exit. Tsipras can really threaten them with nothing. It's a miscalculation, he underestimates how desperate the political mood in Germany and elsewhere has become. 

If Tsipras goes through with his threat, Greece will be cut off from ELA and TARGET-2 and that will be that. Check my Catch 22 Revisited post.

The Germans have had enough, and so have many others - primarily Portugal and Ireland, who are furious that the Greeks are threatening to drag them down with them. 

The chances of Greece getting kicked out have risen to 85% in my opinion.

Desperate Political Mood

Perhaps Germany misunderstands the desperate political mood in Greece. More importantly, given the politically charged emotions, does anyone understand anything or is it all a pack of lies and suppositions everywhere?

If the ECB Prints, Would Germany Exit the Euro?

If Tsipras wins the June 17th election (I think it is a 60+% chance) then if the ECB would be made insolvent as Dallara suggests, what would Germany do? What would the ECB to do?

If the ECB prints, would Germany leave?

Thus it is not so simple as to say "Germans have had enough" given that Mario Draghi sits as ECB president. Would Germany exit the euro if Draghi takes a course of action Germany does not agree with?

Those are the questions at hand now. Clearly the questions have escalated in significance.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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