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, Zerohedge.com 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.