The European Central Bank warned yesterday against so-called restructuring of Greece’s debt, taking a hard line once again as EU leaders chew on “soft” options.
ECB chief economist Juergen Stark called talk of changing repayment terms for Athens “a recipe for catastrophe,” during a conference in the Greek coastal resort of Lagonissi.
“It is an illusion to think that debt restructuring, haircut or whatever would help to resolve the problems this country is facing,” Mr Stark said.
In Milan, fellow ECB executive board member Lorenzo Bini Smaghi was quoted by Dow Jones Newswires as adding: “I reject a soft restructuring option for Greece.
“I don’t know what this means and we have to be very careful in giving signals to financial markets,” he said.
Vague terms are being tossed around in response to the Greek crisis, but what really worries most leaders is a repetition of the 2008 financial crisis, when money markets froze after the collapse of US investment bank Lehman Brothers.
A “hard” restructuring would likely involve sharp losses dubbed “haircuts” for banks in Greece and elsewhere and for any institution or individual with money invested in Greek bonds, and analysts said ECB and European Union (EU) leaders were trying to protect the eurozone from being hurt by such fall-out.
“The big issue in Europe is not really Greece,” Berenberg Bank chief economist Holger Schmieding told AFP.
“The big issue is the risk of contagion to countries such as Spain,” a debt laden country with one of the biggest economies in the eurozone.
Many EU personalities nonetheless appear ready to consider a voluntary “soft” restructuring, or “reprofiling” of the debt. Under such an arrangement, private investors would agree to wait longer to be paid back.
Jean-Claude Juncker, head of the Eurogroup of finance ministers said on Tuesday that experts from the EU, International Monetary Fund and ECB first had to determine that Greece was making a real effort to restore its finances.
“Then we must see if it is possible to make a soft restructuring of Greek debt,” Mr Juncker said.
European Commissioner Olli Rehn added that although a “hard” option was not on the table, “the so-called reprofiling or rescheduling on a voluntary basis could also be examined.”
Deutsche Bank economist Gilles Moec told AFP: “We’ve seen some progress in terms of the policymakers getting closer to what the markets would probably accept.”
ING counterpart Carsten Brzeski warned however that “whether and how debtors would agree to such a voluntary reprofiling remains unclear.”