Revelations by American economist James Galbraith about a Plan B for Greece masterminded by former Finance Minister Yanis Varoufakis on Tuesday fueled a political storm, with New Democracy securing approval from Parliament for a discussion on setting up a House investigative committee into last year’s negotiations with creditors.
There is nothing new in Galbraiths book “Welcome to the Poisoned Chalice: The Destruction of Greece and the Future of Europe”, and in any case the alternative plan was never approved by the prime minister. Varoufakis himself responded to criticism by saying that it would have been negligent of a government not to have a plan B in case Greece was forced into a Grexit.
Varoufakis however was not the only one with an alternative plan. The European institutions and IMF were apparently working on a (secret) Grexit plan since 2012.
And at the time that was seen as completely a normal, responsible precaution, as the switching of a currency is not a simple event that can take place overnight.
By early 2012, many EU officials believed it was irresponsible not to prepare for a Greek exit. “We always said: it’s our aim to keep them inside,” said one participant. “Is the probability zero that they leave? No. If you are on the board of a company and you only have a 10 per cent probability for such an event, you prepare yourself.”
In May 2014, just before the European elections, FT’s Peter Spiegel revealed Europe’s secret plan, codenamed Z, about how to handle a Grexit. The plan has been in existence since 2012 – when there were fears that Syriza might win the election.
So in the knowledge that there was a push to get Greece out of the eurozone Varoufakis had no choice but to consider a contingency plan of his own in case Europe succeeded.
Peter Spiegel: Unbeknown to almost the entire Greek political establishment, a small group of EU and International Monetary Fund officials had been working clandestinely for months preparing for a collapse of Greece’s banks. Their secret blueprint, known as “Plan Z”, was a detailed script of how to reconstruct Greece’s economic and financial infrastructure if it were to leave the euro.
It was also reported i that during a dinner between José Manuel Barroso, the commission president, and Ms Merkel at the chancellery in Berlin less than two weeks before the Greek vote, Ms Merkel asked for reassurance from Mr Barroso that a plan was in place in case Greece rejected bailout conditions and Grexit ensued.
Plan Z was an action plan to create a new financial system
Although the FT was not given access to Plan Z documents, the reporter confirms that officials who saw them said they amounted to a detailed script of how to create a new financial system from scratch.
In Washington, IMF officials prepared a 20-page matrix of actions. Drawing on their experience on bank runs and currency crises, officials said the detailed IMF blueprint included such drastic action as turning off all ATMs and reinstating border controls to prevent massive capital flight.
At the ECB, officials studied Argentina’s experience of issuing IOUs during their 2001 currency crisis, since the euro notes and coins circulating in Greece would no longer be legal tender. Among the options was issuing Greek IOUs worth about half the value of those euros, since getting new bank notes to Greece would be a logistical nightmare.
ECB officials examined the US military’s introduction of new dinars into Iraq in 2003 but were humbled by the logistical challenge; the US effort took only three months but relied on the air and land assets of the world’s largest armed forces. Greece’s capacity to print notes on its own was limited; since the euro was introduced, Athens had mostly printed €10 notes.
Equally complicated was the basic “plumbing” of the Greek economy. Greece, like all other eurozone countries, is connected by a network called Target 2, a giant proprietary computer system run by the ECB and national central banks that make most commercial transactions possible. Once Greece was disconnected from Target 2, it would have no way to clear transactions, grinding the economy to a halt. The entire system would have to be rebuilt.
Similar work was occurring in Brussels. Some of it was thick in EU law: how can a ringfenced economy still be a fully integrated member of the EU’s internal market, which requires a free flow of goods? Would borders have to close? What were the legal authorities to set up capital controls? Other preparations were much more practical, such as which officials would appear in public to announce Greece’s new status.
“The people who would have been responsible for pulling a switch, they would have received in good time a paper saying: you’ve got to do this and this and this,” said a participant.
To many who worked on the project, Plan Z was as much an argument as an action plan. They wanted to demonstrate to those advocating for Grexit that the job was Herculean, something they could not conceivably back once they realised how difficult it would become.
“Rules would clearly prohibit providing liquidity without adequate collateral, so that means you kill the country within hours,” said an ECB official involved in the deliberations. To restart the banks, a new currency would be needed.
But Mrs Merkel was being given conflicting advice about the costs and the consequences of Grexit by three central bankers whom she relied on heavily during her pre-holiday soundings and trusted implicitly: Mr Asmussen, who had been Mr Schäuble’s deputy before moving to the ECB; Jens Weidmann, her former economic adviser whom she had named head of the Bundesbank a year earlier; and Philipp Hildebrand, former head of the Swiss National Bank.
All shared the concerns about moral hazard and felt it was unlikely Greece would live up to promises made as part of its bailout, which could lead to endless transfers of German taxpayer money to Athens. But they also told the chancellor that trying to predict the cost of Grexit was folly.
Source FT – edited and additional material YXamonakis
