BRUSSELS European Union officials are working on a contingency plan for Greece if its parliament rejects an austerity program and the country cannot receive the next instalment of EU/IMF emergency loans, three euro zone sources said on Monday.
The sources said planning had been going on for several weeks and was designed to ensure Greece gets the liquidity needed to avoid default in the absence of the next, 12 billion euro tranche of its emergency loan package, due by mid-July.
As well as preventing default, the aim is to head off any contagion spreading from Greece to Ireland, Portugal and Spain, and the potential knock-on impact on Europe's banking system, with French and German banks large holders of Greek debt.
The plan is distinct from a French proposal for private sector involvement in a second Greek bailout program and is being discussed despite European Commission President Jose Manuel Barroso and other senior EU officials repeatedly saying that "there is no Plan B for Greece."
"There's been thinking about contingency for some time, for several weeks," one senior euro zone finance official involved in the Greek bailout told Reuters. The other sources seconded that line, saying there was "active planning" to step in if the Greek parliament rejects the austerity program.
"In this sort of situation, you can't afford not to think about what might happen next," the first source said.
The sources would not confirm in detail what the current plan involved, but said several options had already been dismissed, including an EU bridging loan to Athens.
"This option was discussed a few days ago, before the Eurogroup meeting in Luxembourg (on June 19-20), but I understand it's now been ruled out," a second source said.
They would not be drawn on what action banks might take, but British Prime Minister David Cameron made clear at an EU summit last week that banks needed to strengthen their balance sheets and be ready for any potential fallout from Greece.
"All European countries need to use the time that we have to strengthen banks and bank balance sheets and make sure they are meeting all of the requirements so that they are strong and can withstand any problems," he said.
"Banks right across Europe that have exposure to Greece ... every bank needs to make absolutely clear what its exposure is."
Greece has to roll over 2.4 billion euros of 6-month treasury bills on July 15 and 2.0 billion euros of 3-month bills a week later. In August, it has 5.9 billion euros of 5-year bonds maturing and must roll over 2.5 billion of bills.
Failure to refinance the debts would result in the first default since the euro zone was created in 1999.
The Greek parliament will hold votes on June 29 and 30 on the austerity program it has agreed with the EU, IMF and European Central Bank, which includes 6 billion euros of spending cuts and revenue increases this year alone.
The votes are expected to be extremely close, with opposition parties rigidly opposed. While the government has a majority of about five seats in parliament, EU officials are privately concerned that the vote could conceivably be lost.
If the program is rejected, the EU will have no choice but to join the IMF in refusing to disburse the 12 billion euro payment -- the fifth tranche of the 110 billion euro ($156 billion) package of bilateral loans Greece agreed in May 2010.
While Greece may be able to roll over its treasury bills in July, it would not have enough money to redeem the 5.9 billion euros of 5-year bonds it has falling due on August 20.
One of the sources said the most likely way a default would be avoided in that case would be the extension of another loan from a third party, although they would not go into details.
"I find it difficult to believe that no bank, no institution, would be ready to extend Greece a further loan," the source said. "At the right terms, it will be done."
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