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FT: the secret “Plan Z” for Greece’s euro exit

Poul Thomsen from International Monetary Fund, Jorg Asmussen from the European Central Bank, Marco Buti and Thomas Wieser: all four were 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. From the Financial Times series and the excellent work of Peter Spiegel.

The Eurozone crisis, Part 2: Grexit

Inside Europe’s Plan Z:  How the euro was saved

In the second instalment of a series on the year that changed Europe, Peter Spiegel reveals how a secret strategy was developed to contain the firestorm from a Greek exit.

Every working day since the crisis struck, George Provo­poulos, the silver-haired governor of Greece’s central bank, summoned a small “emergency team” of aides to his offices at 6pm to review the health of the nation’s banks. What he was told on June 15 2012 was enough to make the courtly central banker blanch.

It was the Friday before a parliamentary election – the second national vote in as many months – and the country appeared to be edging towards panic. On that day, Greeks withdrew more than €3bn from their bank accounts, or about 1.5 per cent of the country’s entire economic output. The Bank of Greece had watched people moving money from their banks to their mattresses for nearly three years, but never on such a scale.


“In a matter of a few days, a full-blown banking crisis could have erupted,” Mr Provopoulos said in an interview. At that rate, Greece would run out of bank notes in a day or two.


Unbeknown to almost the entire Greek political establishment, however, 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.


The plan was drawn up by about two dozen officials in small teams at the European Commission in Brussels, the European Central Bank in Frankfurt and the IMF in Washington. Officials who worked on the previously undisclosed plan insisted it was not a road map to force Greece out of the euro – quite the opposite. “Grexit”, they feared, would wreak havoc in European financial markets, causing bank runs in other teetering eurozone economies and raising questions of which country would be forced out next.


But by early 2012, many of those same 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.”

Leaving the Greeks out

Work on Plan Z began in earnest in January 2012, largely overseen by four men. Jörg Asmussen, a German who had joined the ECB executive board that month, was assigned by Mr Draghi to head a Grexit task force within the central bank. Thomas Wieser, a long-time Austrian finance ministry official, was appointed permanent head of the “euro working group” of finance ministry deputies and helped co-ordinate work in Brussels with Mr Buti. And Poul Thomsen, a Dane who had headed the IMF’s Greek bailout team since the onset of the crisis, provided input from the fund in Washington.


Efforts to keep information from leaking from the small teams around the four men were extreme for the same reason Mr Trichet had banned such planning: public discovery could be enough to cause the kind of panic that would force them to put their plan into action.


According to one participant, no single Plan Z document was ever compiled and no emails were exchanged between participants about their work. “It was totally fire-walled even within [the institutions],” said the official. “Even between the teams there was fire-walling.” A decision was made not to involve Greek officials out of fear of leaks.


Their firewalls worked. 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.


Mr Barroso acknowledged the plan’s existence and offered to show it to Ms Merkel but she said his word was enough, according to officials in the room. Under the German system, such documents can be requested by the Bundestag, and senior German officials were concerned they would be obliged to disclose such planning if they had it in writing.


An argument and a plan


Although the FT was not given access to Plan Z documents, 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? 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. But in the summer of 2012, Greek voters almost forced their hand.


A hard default


With most of Europe’s attention focused on France, where Mr Sarkozy was fighting an unsuccessful effort to win re-election on the same day as Greece’s first parliamentary election, few outside Greece anticipated the storm that was approaching. Even within Greece many political leaders were stunned when results started rolling in on the evening of Sunday May 6.


For most of the four decades since its return to democracy in 1974, Greece’s electoral politics had been dominated by two parties, Pasok on the left and New Democracy on the right. But as the crisis deepened, amid accusations by bailout monitors of mismanagement under governments led by both parties, that status quo began to splinter.


Anti-government activists on the far left and right, once dismissed as radical fringe groups tossing Molotov cocktails in Athens’ central Syntagma Square, began to gain support from a disaffected electorate. The neo-Nazi Golden Dawn party found a receptive audience among the alienated urban poor; the charismatic Mr Tsipras found his own fertile ground among supporters of Pasok, which had negotiated the hated bailout agreements.


As expected, New Democracy finished first in the vote but it polled less than 19 per cent – a stunning 14.6 percentage points less than it had received in national elections three years earlier. Even more remarkable was the complete collapse of Pasok. It finished third behind Syriza, with just 13 per cent of the vote – 31 points less than in 2009.


“We were not reading properly what was happening in Greek society,” said a veteran Pasok politician. “We knew there was a lot of anger but when you’re caught up in the [bailout] programme and wanting to make it a success and believing that the country needs to change, we did not pick up – nobody did, really – the rise of Golden Dawn, nor the spectacular rise of Syriza, nor our collapse.”


One person who was not surprised was Lucas Papademos, Greece’s technocratic prime minister who had managed to hold the country together during a truncated six months in office. In an interview, the former central banker said opinion polling on the eve of the vote had made him so concerned the election would prove inconclusive that he remained in his office on the Sunday night of the election to prepare for the market shock.


According to Mr Papademos, Greek authorities were concerned in the vote’s immediate aftermath that things could spin out of control if the antagonistic parties were unable to form a government for weeks. But they also feared that a new government, led by Syriza or even New Democracy, would reject the bailout deal, leading EU authorities to pull the plug. “The risk was that the constellation of election results would not allow the formation of a government supportive of the new economic programme,” Mr Papademos said.


In a teleconference, the seven European leaders heading to the Los Cabos G20 summit agreed to stick to a common line: they would promise to support Greece – but only if it abided by the existing bailout’s conditions. There would be no renegotiation.


Without bailout funding, Athens would no longer be able to pay its bills, and there was a €3.1bn bond due on August 20, a portion of which was held by the ECB.


A “hard default” – failing to pay an outstanding bond – was long seen as the most likely route to Grexit since, if there was no one left to lend to Athens, it would not be just the government that ran out of money.

At the time, Greek banks were relying on emergency central bank loans to stay afloat because private investors had stopped lending. To get those central bank loans, Greek banks had to provide some kind of collateral, which, for banks in most countries embroiled in the crisis, meant government bonds. But those government bonds would become worthless in a hard default, so central bank loans would be cut off. Without emergency liquidity assistance, Greece’s banks would collapse. With no banks there was no economy.


This would not happen in a traditional monetary system. But Greece did not have a central bank in the traditional sense. Its central bank was in Frankfurt, run by officials who were mainly not Greek, and there was no way to compel the ECB to lend to Greek banks. The only way to restart the banking system would be for Athens to set up its own central bank and begin printing its own currency.

‘Kill the country in hours’

But Mr Papademos and EU officials began to worry about a second “accidental” route to Grexit after the May election results: a bank run.

If panicked withdrawals began, it could lead to the same place as a “hard default”. Greek banks would literally run out of cash, and the ECB would be unable to fund them because they would be insolvent. “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.

As Greece’s political parties fought over whether they could form a government, Mr Papademos was receiving daily updates from the central bank on totals being withdrawn by depositors; the amounts were becoming so large that he wrote a warning letter to the Greek president. If no government was possible, elections had to be called quickly.

Bank Jogs…

Since the start of 2009, Greek authorities had successfully managed a slow-motion “bank jog” that had seen deposits fall from €245bn to less than €174bn on the eve of the 2012 elections. According to Greek officials, about a third of that money was pulled out of the country entirely; another third was spent to maintain rapidly falling living standards; and a final third was squirrelled away in mattresses and pillowcases for fear the euros could be turned into drachma if they were kept in banks.

Under Mr Provopoulos, the central bank went so far as to fly in extra euros from other parts of the EU to ensure even large withdrawals could be accommodated. A pattern was established: if a Greek depositor asked for a big withdrawal, they were told to come back the next day. For Greek central bankers, it was essential the account holder got the cash when they returned.

“What if a depositor had walked into a bank and asked for his or her money? What if the answer was: ‘I’m sorry, we are short of cash’?” said Mr Provoploulos. “Under the then prevailing conditions, it would have led to widespread concerns and very likely panic among depositors.” An astounding €28.5bn in new banknotes was pumped into Greece in the run-up to the 2012 elections.

But the feverish withdrawals between the May and June votes – the central bank was making shipments 24 hours a day – spooked officials, none more so than those watching from the ECB. A bank run raised questions of democratic legitimacy – should an unelected group of central bankers in Frankfurt, by deciding on their own that Greek banks were no longer solvent, really be the ones to force Greece out of the euro?

Inside the ECB, there was broad consensus that the call that would lead to Grexit should not be made by central bankers. Instead, they would pass the decision to eurozone politicians.

During a June 25 meeting in Brussels with Mr Barroso and Herman Van Rompuy, the European Council president, with Mr Juncker joining by phone, Mr Draghi informed the leaders that eurozone politicians would be asked to guarantee emergency loans to commercial banks before the ECB pulled the plug.

Mr Draghi’s warning was not an academic exercise. One official said Mr Draghi had told the leaders a “period of uncertainty” would begin 30 days before the August bond was due, on July 20. Although Antonis Samaras had cobbled together a coalition the week before, the new government was still demanding renegotiated bailout conditions. And Ms Merkel had not yet decided whether Greece should remain a member of the eurozone.

Full article here

in Greek

PS If they called the plan “Z” it means they had worked through from “A” to “X” and had no other solution?

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