Greek exit from the Euro

Europe plans to man the lifeboats if Greece quits

EUROPEAN leaders are making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, with the governor of the Bank of England, Sir Mervyn King, warning that Europe was ''tearing itself apart''.

the Age,

18 May, 2012

Reports from Athens that massive sums of money were being spirited out of the country intensified concern about the impact of a splintering of the eurozone. One estimate put the cost to the eurozone of a disorderly Greek exit from the currency at $US1 trillion, about 5 per cent of output.

In a speech overnight before flying to the US for the G8 Summit, Prime Minister David Cameron was due to say that the eurozone ''either has to make up or it is looking at a potential break-up'', adding that the choice for Europe's leaders could not be delayed. ''Either Europe has a committed, stable, successful eurozone with an effective firewall, well-capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory, which carries huge risks for everybody,'' he said.

Officials from the Bank of England, the Treasury and the Financial Services Authority were drawing up plans in the expectation that a Greek departure from monetary union - increasingly seen as inevitable by financial markets - could be as damaging to the global economy as the collapse of Lehman Brothers in September 2008.

With a second election in Greece called for June 17, Mr King hinted that the Bank of England would take fresh steps to stimulate growth if policymakers in Europe failed to deal with the crisis.

Doug McWilliams, of the Centre for Economic and Business Research, said a planned break-up of the single currency would cost 2 per cent of eurozone GDP (about $300 billion), but a disorderly collapse would result in a 5 per cent drop in output, a $1 trillion loss. ''The end of the euro in its current form is a certainty,'' he said.

Former British finance minister Alistair Darling said: ''If it spreads to bigger countries, this could be really disastrous for Europe. It could consign us to years of stagnation.''

Capital flight from Greece has increased since it became clear a coalition government could not be formed after the election earlier this month. Greek President Karolos Papoulias said citizens were withdrawing their money amid great fear ''that could develop into panic''. Since the election on May 6, €3 billion was withdrawn from bank accounts, with the central bank reporting that €800 million had been taken out in a single day earlier this week.

Spanish Prime Minister Mariano Rajoy said his country faced trouble financing itself as borrowing costs shot up to ''astronomic'' levels. Irish Finance Minister Michael Noonan said Dublin's plan to return to capital markets in late 2013 might not be achievable because of the uncertainty.

Talks between French President Francois Hollande and German Chancellor Angela Merkel helped to calm nerves in the markets at one stage, with suggestions that Berlin might be amenable to initiatives to boost growth in the austerity-stricken nations.

But the jittery mood was underlined amid reports that the European Central Bank was cutting off its funding lifeline to Greek banks that had failed to amass enough capital to protect them from future losses.

The ECB later said it expected the Greek central bank to use part of the €130 billion bailout from the EU and IMF to ensure the country's banks were safeguarded from collapse, and that they would only receive additional help from Frankfurt once this had happened. Some €18 billion is expected to be released to recapitalise the banks.

Sony Kapoor, of the Brussels-based Re-Define think tank, said: ''The social, political and economic damage to the EU from a Greek exit is potentially incalculable.''