Eurozone banks nearly collapsed, says ECB director
Benoît Coeuré says conditions were very dangerous in autumn of 2011 and banks faced severe difficulties to fund themselves
The Guardian, Thursday 17 May 2012
A senior executive at the European Central Bank has admitted eurozone banks were on the brink of collapse last autumn.
In an interview with the BBC to be broadcast on Thursday, Benoît Coeuré, executive director of the ECB, said: “In the autumn of 2011 the conditions were very dangerous … European banks were facing severe difficulties to fund themselves, to access finance, and we were very close to having a collapse in the banking system in the euro area, which would have also led to a collapse in the economy and to deflation. And this is something that the ECB could not accept.”
The concern about the state of the banking system led to €1tn being lent to banks through three-year loans and came as UK banks were told to make preparations for a potential exit of countries from the single currency.
In November Andrew Bailey, the Financial Services Authority’s top regulator, told banks: “We must not ignore the prospect of the disorderly departure of some countries from the eurozone.”
Those contingency plans are now being dusted down amid speculation over a Greek exit. British banks have taken steps to reduce their exposure to Greek government bonds and other loans.
Icap, the City currency broker, is ready to reintroduce a drachma trading facility by installing a new panel on its electronic screens. Michael Spencer, its chief executive, said: “I don’t think it’s going to happen in the next week, but I think it’s going to happen.” He dismissed concerns about the entire eurozone breaking up, but said other countries might leave and a Greek exit “needs to be organised … sensibly”.
While the timing of any exit is not clear, in their preparations bank banks are assuming a decision would be made quickly as the country would need to close down its borders and its banks to stop funds flooding out of the country.
One unknown is exactly how the Greek currency would be denoted in the payment system – known as Swift (Society for Worldwide Interbank Financial Telecommunication) – that works behind the scenes moving money electronically around the world . The decision lies with the International Standards Organisation.
When Greece joined the euro the drachma had been known as GRD and identified by the numeric code 300. Some bankers hope the new code will be different to ensure computers do not pick up any legacy information. Despite requests by banks for notification of the code, no decision will be made until a formal request by Greece. Then, a decision will be taken within hours.
The hope is that a departure from the eurozone would happen over a weekend, allowing each of the UK’s major banks to deploy hundreds of people to switch over computer systems to allow them to handle the Greek drachma again.
Banks have attempted to cushion the initial impact by selling off their Greek government bonds and reducing their exposure to corporate loans. Legal documents have been checked to ensure loans are written in English law rather than Greek law, permitting payments to continue in euros rather than the new drachma, which is expected to lose at least 50% of its value instantly. Greece joined the single currency at a rate of 350 drachma to the euro.While the computers can be reprogrammed, meeting demands from customers walking into branches to ask for drachma notes will be difficult as the currency will be controlled by Greece’s central bank. Unless officials have been secretly printing drachma notes, the fastest solution could be to stamp drachma or some such symbol across existing euro notes – although Greek shopkeepers and merchants may well be keener to accept clean euros rather than mock drachmas. Banks are also ready to be able to process credit card transactions for their customers in the new currency.