By Brian Blackstone and Todd Buell
FRANKFURT--The European Central Bank warned that the Greek debt
crisis could spread to other at-risk eurozone countries if Athens
fails to reach a financing deal with its international creditors
quickly, underscoring the high stakes involved in the
negotiations.
Meanwhile, International Monetary Fund Director Christine
Lagarde said in a German newspaper interview that a Greek exit from
the euro is a possibility, contradicting comments earlier Thursday
by ECB Vice President Vítor Constâncio that effectively ruled out
such a scenario.
His comments came amid mixed signals over the status of Greece's
debt talks, with Athens striking an optimistic tone that a deal is
within reach, while Germany's finance minister said the two sides
are still far apart.
A Greek default wouldn't automatically mean that its banks are
insolvent, Mr. Constâncio said at a briefing accompanying the
release of a report on financial stability in Europe. But the ECB
would have to include the implications of such an event in its
analysis of the health of the country's financial institutions that
rely heavily on ECB loans for funding, he said.
"There is no automatic connection between a default of the Greek
government and the solvency of the Greek banks," Mr. Constâncio
said, stressing the word "automatic." He noted that the share of
Greek government bonds in total bank capital is quite small. Such
an occurrence may influence the ECB's impairment analysis of the
exposure of Greek banks to the state, he added.
Mr. Constâncio said he was convinced Greece won't exit the euro.
"It is difficult to build up a narrative where that extreme case
can happen," he said. A country cannot legally be expelled from the
currency bloc, he noted, adding that a rising share of Greek
citizens have said they want to stay in the euro.
Still, the ECB warned against complacency in its twice-yearly
Financial Stability Review, which examines Europe's financial
markets and identifies trouble spots.
"Financial-market reactions to the developments in Greece have
been muted to date, but in the absence of a quick agreement on
structural implementation needs, the risk of an upward adjustment
of the risk premia demanded on vulnerable euro-area sovereigns
could materialize," the ECB said.
Greece is in protracted negotiations with its eurozone creditors
over the future of its bailout deal. On Thursday, the Greek
government suggested an agreement was near. "The optimism expressed
by the Greek government is based on actual facts," spokesman
Gabriel Sakellaridis said. "The conditions are ripe to have a
deal."
Other eurozone leaders, such as German Finance Minister Wolfgang
Schäuble, have cast doubt on such claims. "We always hear positive
news coming out of Greece, which is good. However, we haven't
gotten much further in substance in the negotiations between the
three institutions and the Greek government," Mr. Schäuble said on
German public broadcaster ARD on Wednesday.
Talks between the negotiating teams in Brussels are expected to
continue to the end of the week and discussions between eurozone
finance-ministry officials are scheduled for Thursday. Significant
differences remain on pensions, privatization, labor law and fiscal
austerity, eurozone officials say.
Greece is under pressure to agree to economic overhauls with its
creditors to unlock new financing. Athens is believed to have
enough cash left to repay a loan of EUR300 million ($330 million)
to the IMF on June 5, but probably won't have enough to cover three
further repayments due mid-June.
"As we stand here right now, we expect the Greek authorities
will pay us, " IMF spokesman William Murray told reporters in
Washington on Thursday. "Talks are continuing with the Greeks, but
work still needs to be done."
Meanwhile, banks in Greece are heavily dependent on ECB loans
for funding amid a steady decline in bank deposits there. Mr.
Constâncio pegged the total amount of support--through regular ECB
loans and emergency liquidity via the Greek central bank--at EUR114
billion.
The ECB also said in its financial stability report that
European governments need to redouble their economic reform
efforts. While monetary policy "can support the conditions for
economic growth," other policies such as structural reforms "are
needed to underpin sustainable economic growth in the euro area,"
it said.
"The financial stability situation in Europe has improved," Mr.
Constâncio said. "One can say that our policies are working."
In March, the ECB started a broad-based asset-buying program,
known as quantitative easing, where it will buy EUR60 billion a
month of mostly government bonds until the end of September 2016 in
an effort to prop up inflation.
A report Thursday from the European Commission signaled that so
far businesses and consumers in Europe, buoyed by the ECB's
stimulus, have shaken off any concerns stemming from Greece.
The Commission's Economic Sentiment Indicator--which aggregates
the business and consumer measures--was unchanged at 103.8, its
highest level since mid-2011 and well above the average of 100.0
going back to the start of the series in 1990.
Write to Brian Blackstone at brian.blackstone@wsj.com and Todd
Buell at todd.buell@wsj.com