The situation in Greece is of concern and a Greek default may have a contagion effect, European Central Bank Governing Council member Klaas Knot said.
“The already shaky liquidity position of Greek banks will worsen if deposits continue to flow out,” Knot said in the Dutch central bank’s semi-annual Financial Stability Report published on Tuesday. “An unhoped-for bankruptcy of the government would heavily derail the Greek economy” and “the impact of such an event on other countries in the euro-area is still uncertain.”
Greece, Europe’s most-indebted state, is negotiating with euro-area countries and the International Monetary Fund on the terms of its 240 billion-euro ($253 billion) rescue. The standoff, which has left Greece dependent on emergency funding provided by the Bank of Greece, risks leading to a default within weeks and the country’s potential exit from the euro area.
Amid Greece’s turmoil, bonds from Europe’s other indebted nations have surged thanks to the ECB’s 1.1 trillion euro bond-buying plan, with yields from Italy, Spain, Portugal and Ireland plunging to record-lows. That’s in sharp contrast to the debt crisis, when those nation’s all saw borrowing costs spike to euro-era highs amid a concern a Greek exit could spark a domino effect and splinter the currency bloc.
“The ECB’s quantitative easing is masking the risks of credit events, like for example with what might happen with Greece,” said Steven Major, global head of fixed-income research at HSBC Holdings Plc. “While banks may have reduced exposures to Greek debt, these exposures may be shifted or hidden somewhere else. And as in any crisis, things don’t tend to move in a straight line.”
Greece needs to continue with economic reforms and must meet the agreements made in its bailout program, said Knot, who also heads the Dutch central bank. “That’s important for the stability of Greece and for the stability of the currency union.”
Greece’s goal is to unlock about 7 billion euros of aid from its existing bailout program. With a monthly bill of about 1.5 billion euros for pensions and salaries, Greece is targeting an April 24 meeting of euro-area finance ministers as a deadline for the approval of new money.