by Calculated Risk on 5/18/2012 01:46:00 PM

The Greek election is still a month away ...

From the WSJ: EU Official: Greek Exit Plans Discussed

The European Commission and the European Central Bank are drawing up plans should Greece abandon the euro, Trade Commissioner Karel De Gucht said in an interview published Friday, the first time a senior European Union official has acknowledged such preparations.

The ECB and the commission are "working on emergency scenarios in case Greece doesn't make it," Mr. De Gucht said in an interview with the Flemish newspaper De Standaard.
...
European Economics Commissioner Olli Rehn quickly countered Mr. De Gucht's comments about the contingency plans, saying: "We are not working on the scenario of a Greek exit. We are working on the basis of a scenario of Greece staying in."

Here are some comments from analysts at Nomura:

• We expect the ECB to cut the refi rate to 0.50% in July with risks skewed towards less and later; a policy error in our view.
• We assume that the eurozone crisis will escalate and further increase pressure on the ECB: ultimately we expect QE.
• Based on current political trends, a Greek euro-area exit looks probable rather than possible following the 17 June election.

And some other commentary:
From Paul Krugman at the NY Times: Apocalypse Fairly Soon

Right now, Greece is experiencing what’s being called a “bank jog” — a somewhat slow-motion bank run, as more and more depositors pull out their cash in anticipation of a possible Greek exit from the euro. Europe’s central bank is, in effect, financing this bank run by lending Greece the necessary euros; if and (probably) when the central bank decides it can lend no more, Greece will be forced to abandon the euro and issue its own currency again.

This demonstration that the euro is, in fact, reversible would lead, in turn, to runs on Spanish and Italian banks. Once again the European Central Bank would have to choose whether to provide open-ended financing; if it were to say no, the euro as a whole would blow up.

Yet financing isn’t enough.

From Tim Duy at Fed Watch: Closer to Colliding

Can the Troika cave to Greece while remaining credible with other troubled economies? I doubt it - which I think increases the risk that the core of Europe will believe it necessary to create a moral hazard example out of Greece.

Of course, this worked so well with Lehman Brothers. We will just foget about that little detail for the moment.

From Michael Pettis: Europe’s depressing prospects