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After Draghi’s admission…. What’s the Bill for Grexit?

In a stunning admission, chief of European Central Bank, Mario Draghi said that a country can leave the Eurozone but must “Settle its Bill First”. He practically gives the green light to EZ member states wanting to leave the monetary union.

In a letter to two Italian lawmakers in the European Parliament released on Friday, and first reported by Reuters, Mario Draghi implied that a country could leave the euro zone but first it would need to settle or debts with the bloc’s TARGET2 payments system before severing ties.

“If a country were to leave the Eurosystem, its national central bank’s claims on or liabilities to the ECB would need to be settled in full,” Draghi said in the letter. He did not specify in what currency the “settlement” would have to take place. It was also not clear just what the ECB would do in response if a country did not “settle its claims in full”: at last check the ECB did not have a policy-enforcing army.

As Reuters confirms, the comment by Draghi is “a rare reference by Draghi to the possibility of the currency zone losing members.”

Analyzing Draghi’s statement, notes

We would say not just “reference” but admission that a Italexit is all too possible, however the only way the ECB would allow it, would be for Italy first to pay its €357 billion TARGET2 bill (which various confused and clueless tenured economists over the past five years claimed would never be used by the ECB as a bargaining chip in “exit” negotiations and has no political implications; oops).

To be sure, the beneficiary of such a transfer payment would be the country most reliant on the perpetuation of the status quo: Germany, which has some €754 billion in Target2 “assets” which could be nullified should one or more Eurozone countries exit without satisfying their payment obligations.

In the letter, Draghi reiterated that the imbalances were due to the ECB’s own bond buying-program, where many of the sellers are foreign investors with accounts in Germany, and ensuing portfolio rebalancing.

Can Draghi’s admission understood as a hidden to Italy and all weak economies of the Eurozone like Spain and Greece?

Does Draghi’s admission opens a “new can of worms for European stability in addition to concerns about Trump, because not only has Draghi confirmed that an exit from the Eurozone has been explicitly modeled by the central bank, but also lays out the conditions under which it would be considered and permitted?”

How about Grexit?

According to CNN Greece, today the current account balance Target2 – GR of the Bank of Greece is €72.26 billion – significantly lower than the middle of 2011 when it had reached €110 billion.

This amount of €72.26 billion is the minimum amount Greece will have to settle for a “smooth exit from the monetary union” in case of Grexit.

PS I wouldn’t know there were such rules Draghi claims.

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  1. First of all, the formal position of the European Commission — as clearly stated by its legal department — is that the only way to exit the eurozone is for a country to leave the EU itself.
    Secondly, Paul Mason (Channel 4 economics editor) is claiming that he has evidence that the Germans are planning to kick Greece out of the euro in June.
    Thirdly, all debts to the ECB are in euros and have to be repaid in euros.
    Fourthly, I think it very unlikely that the Governor of the ECB would feel entitled to talk about formal legal and political issues of such magnitude and importance without the implicit authorisation of the European Commission and Germany. This is very disturbing, because it backs up Mason’s claim.

    • But….given that Brexit has happened perhaps the EU is thinking that it would be better to allow a member state to leave the Euro and remain an EU member rather than have member states flirting with leaving the EU in order to get out of the Euro?

  2. It makes not much sense to leave the euro and pay the ECB at the same time; I am sure there are ways out of the TARGET2 system, possibly declaring banks bankrupt and nationalising them. Our not-so-super Mario simply tries to toe the line of his masters from the 4th Reich to terrorise their victims in the south. But save of war, there is little anybody can do to prevent exit from the euro straitjacket, especially when this is done by 2-3 countries together, for example Italy and France. I live for this day…

  3. EU rules have been ad hoc loot-as-you-go since 2009.

  4. “but must settle it’s bills first”

    And therefore all that needs to be done is that GREECE DECLARE INSOLVENCY & BANKRUPTCY
    THE BILL WILL COME TO ONE CENT IN EVERY DOLLAR .. to settle it’s bill .. if the EU is lucky.
    Someone should point this fact out to the .. Oh, so clever EU.