FRANKFURT (Reuters) - A country that defaults would not have to leave the euro, the European Central Bank’s vice president said on Monday, in frank remarks about Greece that also touched on possible capital controls and showed how acute Athens’ problems have become.
Speaking as Greece ordered public sector entities to transfer idle reserves to the central bank to help with a cash squeeze, Vitor Constancio discussed the possibility of a debt default and controls on the movement of money, saying neither necessarily meant a departure from the currency bloc.
“If a default will happen ... the legislation does not allow that a country that has a default ... can be expelled from the euro,” he told the European Parliament, saying that Greek banks had been told not to increase their exposure to the state to avoid “a possible credit event regarding the state”.
The comments from the typically reserved Constancio underscore the seriousness of Greece’s predicament and are the most open yet from the ECB, which is providing 110 billion euros of liquidity to the country and its banks.
Constancio also touched on the possibility of capital controls.
“Capital controls can only be introduced if the Greek government requests,” he said, adding that they should be temporary and exceptional. “As you saw in the case of Cyprus, capital controls did not imply getting out of the euro.”
Constancio underscored ECB support for Greece, telling lawmakers he was sure it would stay in the currency bloc.
“We are convinced at the ECB that there will be no Greek exit,” he said. “The (European Union) treaty does not foresee that a country can be formally, legally expelled from the euro. We think it should not happen.”
As it stands, the central bank is approving an ever growing amount of emergency funding for Greece’s lenders. While Constancio said this could not continue regardless of the circumstances, he hinted that the ECB would be loath to pull the plug.
“If the state defaults, that has no automatic implications regarding the banks, if the banks have not defaulted, if the banks are solvent and if the banks have collateral that is accepted,” Constancio said.
Greece is close to having to repay the International Monetary Fund about 1 billion euros in May and officials at the ECB are growing concerned.
The ECB has analyzed a scenario in which Greece runs out of money and starts paying civil servants with IOUs, creating a virtual second currency within the euro bloc, people with knowledge of the exercise told Reuters last week.
Editing by Gareth Jones