Phillip Inman Sunday 19 April 2015
ECB chief warns Europe would be entering ‘uncharted waters’ if Greece defaults on its debts
Mario Draghi, head of the European Central Bank, addresses a press conference in Washington on 18 April 2015. Photograph: Pete Marovich/EPA
The European Central Bank has raised the prospect of Greece crashing out of the euro after it said financial buffers were sufficient to prevent contagion to other weak economies in the currency union.
ECB president Mario Draghi said funds were sufficient to cope should Athens default on its debts, but warned that Europe would be entering “uncharted waters” that made the outcome of a default uncertain.
The intervention comes only weeks before Greece is due to agree a new rescue deal with its creditors. Negotiators in Brussels have become increasingly exasperated with the stance of the radical left Greek administration, which they accuse of failing to present concrete proposals for reform to allow the release of vital bailout funds.
Speaking in Washington at the International Monetary Fund’s spring meetings, Draghi said: “The short-term danger of contagion [from a Greek exit] is difficult to assess, but we have enough buffers in place. And even though they were designed for different circumstances, they are sufficient. But we are entering uncharted waters.”
Draghi, who met Greek finance minister Yanis Varoufakis in Washington for informal talks, said there had been progress in “formulating a well-functioning policy dialogue” between Greece and the troika of lenders – the EU commission, ECB and IMF.
He also supported an earlier call from the IMF for EU negotiators to slim down their list of demands during debt talks with Greece amid fears that time is running out to reach a deal.
In a move seen widely as offering an olive branch to Greece, Poul Thomsen, head of the IMF’s European department, said the reforms being demanded from Athens in exchange for a vital €7.2bn (£5.2bn) in rescue funds should be simplified and slimmed down.
But Draghi said the aim of talks was still to reach “a comprehensive package within which the policies can be monitored”.
The radical left Syriza administration has so far resisted demands that reforms should be monitored by Brussels and aid tied to detailed targets.
Last week the IMF rebuffed a call for a delay in debt payments due next month. Despite denials from the Greek finance ministry, it is understood that Varoufakis asked for a delay while talks continued. Little is known about the state of Greece’s finances, but there are fears that in the next few weeks it could run out of money to pay welfare bills and public sector wages if it is forced make scheduled debt repayments.
Draghi said ECB funds would continue to be channelled to the Greek central bank to maintain the viability of the country’s banking sector, which has suffered a massive outflow of funds during the crisis.
Asked about the consequences of Greece defaulting on its loan repayments, he said: “I don’t want to even contemplate such an event because the Greek leaders have said they will always meet their commitments.”
Varoufakis claimed the support of Barack Obama as he prepared to leave Washington following a whirlwind tour of newsroom studios and bilateral talks during the IMF meetings. The conversation with Obama was brief, according to Varoufakis, who said that Obama expressed his desire for flexibility on all sides.
In a speech on Saturday to the IMF’s steering committee, US Treasury secretary Jacob Lew said a Greek default would “create immediate hardship” for the country and damage the world economy, but sources close to the Treasury distanced him and the White House from offering support to Athens’s negotiating stance.
Lew warned South Korea, Germany, China and Japan to do more to increase consumer demand in their own countries instead of relying on exports to the US and elsewhere for growth.
Eurozone finance ministers have become increasingly frustrated at delays over a new package and many think a Greek exit is likely. More talks are due in the Latvian capital Riga next week at a Eurozone finance ministers’ meeting. German finance minister Wolfgang Schäuble says agreement is unlikely.