#patrick honohan

[caption id="attachment_720" align="alignnone" width="300" caption="Officials Talk Openly of Greek Euro Exit"][/caption]

With only enough cash on hand to keep the country afloat for just another month or so, the noose is tightening on Greece. The next aid installment – approximately 30 billion euros – is desperately needed to meet upcoming debt obligations, but is contingent upon Greece first implementing a further 11 percent in spending cuts.

Meanwhile, the results of the election earlier this month failed to result in a clear winner leaving the country absent an effective government when a strong voice is most urgently needed. With new elections not scheduled until June 17th, the likelihood of Greece meeting the spending cut target in time to ensure the next tranche of emergency funding is doubtful. Should this result in a significant delay or outright withdrawal of support, Greece will be unable to meet its next round of debt repayment obligations thereby forcing the country into an uncontrolled sovereign default.

Given the measures Eurozone officials have already undertaken to protect against a Greek default, it is difficult to understand why now, after having already committed billions to the effort, Greece would be permitted to fail. Certainly, in public, politicians continue to pledge their support to keeping Greece within the fold; but, for the first time, highly-placed officials are daring to suggest that Greece’s continued participation within the Eurozone may not be guaranteed.

Last weekend, a policymaker with the European Central Bank, Irish Central Bank member Patrick Honohan, stated that while a collapse in Greece would have an immediate impact on the Eurozone, the damage could be contained. This is significant as it is the clearest instance yet of an ECB member acknowledging that a Greek exit from the region is a potential outcome.

“Technically, it (a Greek exit) can be managed. It would be a knock to the confidence for the euro area as a whole, so it would add to the complexity of the operation until things settle down again”, Honohan noted in an address to an audience in the Estonian capital of Tallinn. “It is not necessarily fatal, but it is not attractive,” he said.

On Wednesday, ECB President Mario Draghi told reporters in Frankfurt that, on the question of Greece leaving the euro, it was not for the ECB’s Governing Council to determine if Greece should or should not remain. According to Draghi, the ECB executive will “continue to comply with the mandate of keeping price stability over the medium term in line with treaty provisions and preserving the integrity of our balance sheet.”

Drahgi noted that the original agreement that created the Eurozone did not have a provision for a member nation leaving the union. Therefore, Draghi said the question of Greece’s continued participation within the Eurozone “is not a matter for the Governing Council to decide”.

Nevertheless, this apparent shift in tone is very telling and signals that there is a growing acceptance that efforts to save Greece have failed. Reading even more into the latest comments, it seems that there is even an acceptance of the inevitability of a Greek default.

As a result, the message has morphed to one of containment; yes, the repercussions of a Greek failure are significant, but are still manageable according to the ECB. What is key now is to prevent a “chain reaction” contagion should Greece return to the drachma.

After all, if Greece fails, what is to prevent the much larger, but equally challenged economies of Spain or even Italy from falling to a similar fate? And while it may very well be true that the Eurozone could survive the exit of Greece, to lose one of the larger economies would surely spell the end of the euro.