The European Central Bank’s holdings of Greek government bonds are small enough for it to be able to survive even a large haircut if the country defaults, and its main concerns lie with the impact on the banking sector.
The Greek media reported a week ago that Finance Minister Evangelos Venizelos had discussed plans for an orderly default with the International Monetary Fund chief Christine Lagarde and the president of the European Central Bank, Jean-Claude Trichet, as one of three possible scenarios for resolving the country’s fiscal woes. Until recently, European leaders have rejected any chance of Greece defaulting, but are moving to allow for the possibility of this happening. If it comes to a default of Greece — orderly or disorderly — the bigger problem for the E.C.B. would be the systemic risks stemming from such a step. Talk that Europe needs to shore up its banks — if necessary with capital from taxpayers — is gathering strength. Stress in the interbank lending market is already an “indication that the crisis has moved into systemic mode.