ECB preparation for Greek default

Blog post

ECB preparation for Greek default

Publishing date: 13 February 2012
Authors: Guntram B. Wolff

My colleague Shahin has just posted a blog entry in which he argues that the broad framework of European Financial safety nets is in place and will not improve very meaningfully after the ESM is ratified. Therefore, time may have come to let Greece default. However, he is concerned that the ECB will not agree to do so because of lack of preparation for what would be needed. In particular, he argues that to preserve the integrity of monetary union, the ECB will either have to expand the ELA and let Target 2 balances rise substantially more. Alternatively, if it refuses to do so, in anticipation or in response to a euro area exit, it may become necessary to impose capital controls to prevent capital flights from the other peripheral countries.

I disagree with both. First, the eurosystem is by now prepared for a Greek default. The December 8 decision of the ECB's governing council has already lowered collateral standards (link to ). In particular, "To increase collateral availability by (i) reducing the rating threshold for certain asset-backed securities (ABS) and (ii) allowing national central banks (NCBs), as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria. ..." It seems that there is sufficient flexibility to provide additional liquidity to the banks in Greece if needed. Greek government bonds could largely become unnecessary for liquidity.

Suggesting capital controls is more worrying. Indeed, imposing capital controls would basically imply the end of monetary union. The slightest doubt that this is seriously contemplated would lead to an unprecedented panic. Overall, I agree with Muenchau's recent . A managed default inside the eurozone is possible. Claims of contagion effects of this appear to be largely exaggerated. Absolute exposures to Greece are minimal by now (France and Germany have around 7bn in their banking system of Greek debt). More importantly, yields of other countries have typically come down after every decision to involve private creditors in Greece during 2011 (see my column). During the last two months yields have come down even further despite the more and more imminent default of Greece. So why would the actual event make a difference now?

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.