The Reserve Bank is putting a 60% chance on the eurozone 'muddling through' its debt crisis with no members leaving, a 30% chance of a Greek exit, and a 10% chance others will follow Greece, Governor Alan Bollard told Parliament's Finance and Expenditure select committee today.
A Greek exit could happen in a moderately tidy way, and not have too many implications, Bollard said. However there was a chance it led to wider contagion.
“The real concern, both in Europe and around the world, is, could a Greek exit spark off contagion through into other peripheral countries that are bigger and more important, and where there are liabilities that are held by German and French banks – and I’m talking about Spain and Italy," Bollard said.
“We think there’s a small chance of that, but it’s absolutely a real chance," he said.
“In a situation like that, we’d be looking very much at both the funding markets and the trading markets. Were we to see funding markets close up to the extent that it was causing any stress in the banking system, we would expect to be able to put in place some of the measures that we have already tried out during the global financial crisis.”
That included making liquidity facilities available to banks for receipt of appropriate securities and at a price.
The Official Cash Rate could also be cut from its record low 2.5%.
“We’re in a reasonably comfortable position in that we can do that. But, I should say that we’re not planning to do that at the minute. Certainly we’ll watch it as a contingency," Bollard said.