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Noyer Rules Out Greek Debt Restructuring, Says Austerity Is Only Solution

Photographer: Michele Tantussi/Bloomberg

European Central Bank Governing Council member Christian Noyer. Close

European Central Bank Governing Council member Christian Noyer.

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Photographer: Michele Tantussi/Bloomberg

European Central Bank Governing Council member Christian Noyer.

European Central Bank Governing Council member Christian Noyer ruled out a restructuring of Greece’s debt, calling it a “horror story” that would leave the nation shut out of financing for years.

“There’s no solution possible” for Greece other than its austerity program, Noyer, Bank of France governor, told reporters in Paris today. “Restructuring is not a solution, it’s a horror story.” If the country fails to meet the terms of its bailout, Greek government debt will be “ineligible as collateral” at the ECB, he said.

ECB leaders and European Union policy makers are clashing over how to prevent the currency region’s first default, after 256 billion euros ($360 billion) in bailouts to Greece, Ireland and Portugal failed to stop contagion from the debt crisis. A year after its 110 billion-euro rescue, Greece remains shut out of financial markets and the cost of insuring its debt against default is at a record high.

“The lengthening of maturities raises very difficult questions,” Noyer said. “There’s a strong chance it will be the equivalent of a default.”

Credit-default swaps on Greek debt increased 96 basis points to 1,496 today, after Prime Minister George Papandreou’s government backed a new package of spending cuts and state-asset sales yesterday. The yield on the country’s 10-year bond was down 18 basis points at 16.85 percent.

ECB Position

Bank of France Governor Noyer’s remarks put him in line with ECB Executive Council members Juergen Stark and Lorenzo Bini Smaghi as well as Bundesbank President Jens Weidmann. All of them have said the Frankfurt-based ECB may stop accepting Greek sovereign debt as collateral if euro-area governments proceed with a plan to extend Greece’s debt repayment schedule.

The ECB last year suspended the minimum credit-rating threshold for Greek bonds after the country’s banks were shut out of credit markets for funding. Banks can borrow as much money as they need for up to three months against collateral.

The ECB “accepted temporarily to reduce our minimum level of collateral to BBB,” Noyer said. “If the program is no longer respected, if a country is found off track, immediately our assumption of BBB disappears. If it goes out of the EU program, the collateral is ineligible.”

Rescheduling

European Union finance ministers on May 16 floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying the bailout has failed to restore the country’s financial health. On May 20, Fitch Ratings cut Greece’s credit rating to B+ from BB+, saying that extending its debt maturities would “trigger a credit event and default rating.”

To avert that possibility, Greek Prime Minister George Papandreou’s Cabinet agreed to sell stakes in Hellenic Telecommunications Organization SA by the end of next month, as well as Public Power Corp SA, Hellenic Postbank SA, and the country’s ports. The state’s stakes in those three companies currently have a market value of 2.1 billion euros.

The government, which also endorsed 6 billion euros in budget cuts, said it would create a fund comprising assets to accelerate the sales, intended to raise 50 billion euros by 2015. The bulk of that will come from selling 35 billion euros of real estate.

Linking Aid

EU policy makers have linked the possibility of further aid to Greece to faster asset sales and additional budget cuts. The Greek Cabinet’s decision may allow EU and International Monetary Fund inspectors, due in Athens this week, to sign off on the bailout’s next installment of 12 billion euros. Greece may have to stop paying its creditors if it does not receive the payment, Finance Minister George Papaconstantinou has said.

Greece now needs to implement the asset sales, reduce monopolies and improve tax collection, Bini Smaghi said in an interview with Austrian ORF radio broadcast today. “People may not like to pay taxes, but that’s the way it is in the European Union,” he said.

Credit-default swaps signal that Greece has about an 80 percent chance of default, Nariman Behravesh, chief economist at IHS Inc., said in an interview today on Bloomberg Television’s “InsideTrack” with Deirdre Bolton. “The markets are getting impatient, they don’t see a real sort of light at the end of the tunnel,” and will impose a negotiated solution to the Greek crisis “in the next three, four, five months.”

Moody’s Concern

Moody’s Investors Service said today that debt-repayment extensions -- what European officials term “soft restructuring” -- would constitute a default and shut Greece out of capital markets for a “sustained period.”

In the case of a default, “the Greek banking sector would require recapitalizing to offset banks’ losses on Greek government bonds, and continued liquidity support from the European Central Bank, at least for as long as the sovereign’s own access to the capital markets remained impaired,” according to the Moody’s note.

Any restructuring of Greece’s debt would cost European taxpayers more as Greek banks would become insolvent, requiring government support that would eventually have to come from other countries, Noyer said. Among other losers in a restructuring would be Greek pension funds, the ECB and European governments who have already lent to Greece, he said.

“No one would be able to finance the Greek state for coming years,” Noyer said. “This is the horror scenario.”

The ECB is also concerned that allowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Portugal and Ireland, which followed Greece in accepting bailouts. The ECB has bought 76 billion euros of bonds of fiscally stressed countries in the past year and may suffer along with private investors in any restructuring.

Contagion Risk

A Greek restructuring wouldn’t improve the sustainability of the country’s debt and “the risks for contagion to other countries would significantly rise,” Weidmann said on May 20. That day, Standard & Poor’s warned it may cut Italy’s credit rating, while Belgium had the outlook on its investment-grade credit rating lowered to negative by Fitch yesterday.

ECB policy makers have called on governments to toughen austerity measures and step up efforts to restore investor confidence in the 17-member currency union. Greece’s additional budget cuts are worth about 2.8 percent of gross domestic product and aimed at reaching a 7.5 percent deficit target for 2011, Papaconstantinou said yesterday.

The ECB has provided banks with unlimited liquidity over three months. Greek banks’ reliance on ECB liquidity amounted to 87.9 billion euros in March, the Greek central bank said May 11.

Any restructuring would undermine the collateral Greek banks use to gain ECB loans, Stark said on May 20. Bini Smaghi that day said restructuring would “jeopardize all of Europe.”

For Greece ‘to reduce the stock of debt, the only solution is ambitious privatization,” Noyer said. “It is necessary to have the equivalent of an internal devaluation. Cut production costs. There is no other solution.”

To contact the reporter on this story: Mark Deen in Paris at markdeen@bloomberg.net.

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net.

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