Central Banks ‘Planning for Euro Area Break-Up’

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Before launching into the chart update, here are a few items that caught our attention. One was a Reuters report that European central banks that are members of the euro-system are quietly planning for a 'shock' that could lead to a break-up of the currency union.

As Reuters reports:

"Euro zone central bankers are looking at the possibility of a shock to the currency area that could trigger its partial break up and their priority in such a scenario would be to preserve the system's survivors, central bank officials say.


In private, euro zone central bank officials say a lot of the pieces in Europe's policy puzzle need to fall into place to calm financial markets and see off the crisis. An official at one of the bloc's 17 national central banks identified a collapse in a peripheral euro zone country's banking system as something that could trigger a break-up of the bloc in its existing form.

The ECB hosted a crisis communications exercise with officials from national euro zone central banks late last month that included a commercial bank collapse scenario. In the event of such a banking collapse leading to a country defaulting and – in a worst case scenario – leaving the euro zone, the central bank official said policymakers' priority would be to protect the rest of the bloc.

"In such a situation, we have to safeguard the rest of the system," the official said, adding that this could involve reshaping the euro zone's EFSF rescue fund and recapitalizing banks. Another euro zone central bank official pointed to Franco-German group Dexia as an example of a euro zone bank that recently got into trouble, requiring a government rescue, although the wider impact was limited.

The likely burden of bailing out Dexia led ratings agency Moody's to warn Belgium its Aa1 government bond ratings may fall. Standard & Poor's subsequently downgraded Belgium, saying funding and market risk pressures were raising the chances its financial sector will need more support.


Euro zone central bank officials have privately cited market expectations for a 20-25 percent chance of a euro zone break-up, though they believe markets will turn more positive if governments deliver the tougher fiscal rules the ECB wants. They are loathe to speak about a "Plan B" – or crisis contingency planning – with heavy ECB involvement for fear that this will reduce governments' incentive to push ahead with "Plan A": implementing economic reforms, kick-starting the euro zone's EFSF rescue fund and adopting tighter fiscal rules.

"What I think is important at the moment is not showing politicians that there might be an alternative, because in their mind that might be less costly than the options they have," the central bank official said.

The ECB wants euro zone governments to agree a new "fiscal compact" and a summit of European Union leaders in Brussels on Thursday and Friday is an opportunity to agree on treaty change to anchor coercive budget discipline in the bloc. German Chancellor Angela Merkel has said, however, that the "marathon" crisis will take years to solve.

In Britain, top officials are not waiting to see if their euro zone peers can deal with what Merkel says could be Europe's toughest hour since World War Two. Instead they are already discussing a potential euro zone break-up scenario.

"The government together with the FSA and the Bank of England are making contingency plans against a wide range of contingencies," Bank of England Governor Mervyn King said last week, without detailing the nature of the plans.“

(emphasis added)

Some contingency planning probably makes eminent sense at this point. Note in the portions of the article highlighted above that the 'disaster scenario' proceeds from the idea of a large commercial bank failure. This is testament to how rickety the banking system has become and makes Mario Monti's decision to enforce 'electronic payments' on amounts exceeding € 1,000 all the more odious. While this is officially clad as an attempt to create obstacles to tax evasion, it has the unfortunate side effect of forcing people to use the banking system whether or not they like to do so. One feels a bit reminded of the attempts of Sweden's socialist commissar-bureaucrats to create a 'cash-less' society (see 'Sweden Discusses Cash Ban' from last year) by forbidding cash transactions altogether – using the flimsiest of reasoning as their justification.

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