European Central Bank Vice President Vitor Constancio said the consequences of a possible Greek debt restructuring would be “dire,” heightening ECB warnings over such a step.
“You just have to look to all the historical examples of countries that have had to, in the end as a last resort, restructure their debt,” Constancio told reporters today in Brussels. “The consequences were dire in terms of further downgrades of the whole debt of the country, in terms of difficulties of the banking sector to finance itself and to finance the economy.”
ECB officials are seeking to counter signals by European Union politicians that a Greek debt restructuring is a possibility as the EU considers further financial assistance to the country. Luxembourg Prime Minister Jean-Claude Juncker said this week that a “soft restructuring,” which would include a voluntary extension of the maturities of bonds held by private investors, is an option after the Greek government takes extra steps to narrow the budget deficit.
“Deep recessions followed” previous restructurings by other countries, Constancio said. “Contagion effects also, which would be even more important in the case of Europe in view of the fact that we are in a monetary union with very much intertwined financial sectors.”
The best approach for Greece is to step up its economic-adjustment program begun last year, according to Constancio.
“We should stick with the program as long as it is working,” Constancio said. “Right now it needs new measures from the part of the Greek government because that’s the best approach.”
In that context, he urged private investors to maintain their holdings of Greek debt a year after Greece received 110 billion euros ($156 billion) in emergency aid from euro-area governments and the International Monetary Fund.
“Initially, when the problems started with Greece, financial institutions promised to keep their exposures,” Constancio said. “That’s something that could be helpful and relevant in the present situation. Any other path can lead to more negative consequences.”
The key is for Greece to take measures that ensure debt sustainability, Constancio said. A Greek restructuring would set a post-World War II precedent, he said.
“These cases have been mostly in emerging economies,” Constancio said. “There has not been any sort of restructuring in advanced economies since at least World War II and the consequences in an advanced economy can be even more negative than in other cases.”