Greece needs ‘firewall,’ Flaherty says

The realization that Greece’s failed finances may be beyond repair is prompting calls for a drastic course of action: Quarantine.
Among those advocating for the establishment of a “firewall” around Greece is federal Finance Minister Jim Flaherty.
“The danger is that the Greek situation unravels and that that would have a contagion effect on European banks,” Mr. Flaherty told reporters on Wednesday, adding, “we want to make sure the situation’s contained.”
He called for “a plan that would create a firewall that would ensure that this type of issue would not spread beyond Greece.”
Political convulsions in Greece, along with the sobering fact that billions of euros in rescue funds have done nothing to alleviate the country’s astronomical debt burden, have hopes for a Greek recovery slipping away.
Any relief felt after Greek Prime Minister George Papandreou survived a no-confidence vote on Tuesday was fleeting, with the opposition party vowing to resist further austerity measures.
Parliament has one week to enact an additional €28-billion in tax hikes and spending cuts in order to secure a fifth tranche of loans from the eurozone worth €12-billion. Failure to comply with its lenders’ ultimatum and Greece could miss out on a second bailout package, which could total €120-billion in additional bailout funds.
With default looking ever more likely, the great fear is that a major Greek credit event could imperil some large European banks, given the substantial cross-border sovereign debt held in the eurozone’s biggest economies.
“If there were a failure to resolve that situation it would pose threats to the European financial system, the global financial system, and to European political unity I would conjecture as well,” Federal Reserve Chairman Ben Bernanke said on Wednesday, underlining the exposure of European money market funds to Greek debt.
“They do have very substantial exposure to European banks and the so-called core countries — Germany, France, etc. So to the extent that there is indirect impact on the core European banks, that does pose some concern to money market mutual funds,” he said at a news conference following the Fed’s policy meeting.
Mr. Bernanke said funds and banks in the United States have limited exposure to sovereign debt in the eurozone’s periphery, but noted that “a disorderly default in one of those countries would no doubt roil financial markets globally, would have a big impact on credit spreads, on stock prices and so on.”
Similarly, Canada’s pillars of finance have no substantial direct exposure to Greek tremors, but by no means can be considered insulated, according to the Bank of Canada’s June Financial System Review.
The central bank identified unsustainable global sovereign debt burdens as the chief threat to Canadian financial stability.
“Whether or not a credit event occurs, a further deterioration of the situation could trigger a sharp repricing of credit risk for other heavily indebted countries or a retrenchment from risk-taking, both within and outside the euro area,” the document said. “This could severely restrict access to funding, undermining the global economic recovery.”
Most analysts doubt that Greece will be able to sufficiently cut its debt of €340-billion, amounting to more than €30,000 euros for each of its 11.3 million people.
“Even if Germany and the (European Central Bank) can reach some form of compromise on the issue of private sector involvement in the new bailout, we doubt that this will prevent Greece from eventually defaulting,” Ben May, an economist with Capital Economics, said in a note.
“After all, the scale of Greece’s problems means that markets may be reluctant to lend to Greece after the second bail-out package expires. What’s more, given the widespread opposition to the additional austerity measures, there remains a risk that the Greek government might eventually choose to default, regardless of whether a bailout package is in place.”
With files from Reuters