ECB Rejects Greek Restructuring in Clash With Policy Makers

ECB Executive Board Member Juergen Stark
ECB Executive Board member Juergen Stark said, “A Greek debt restructuring is not the appropriate way forward - it would create a catastrophe.” Photographer: Jerome Favre/Bloomberg

European Central Bank officials ruled out a Greek debt restructuring, clashing with political leaders over a solution to the sovereign financial crisis.

“A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe” because it would damage the banking system, ECB Executive Board member Juergen Stark said today in Lagonissi, Greece. Fellow board member Lorenzo Bini Smaghi said in Milan that “a solution for reducing debt but not paying for it will not work.”

European Union finance ministers for the first time this week floated the idea of extending Greece’s debt-repayment schedule as the nation struggles to meet the terms of last year’s 110 billion-euro ($156 billion) rescue. EU officials say that Greece won’t be able to return to markets and sell 27 billion euros of bonds next year as scheduled under the bailout, leaving them searching for alternatives to avoid a default.

The yield on Greece’s 10-year bond rose 17 basis points today to 15.8 percent, more than twice the rate at the time of the bailout a year ago. The country’s two-year bond yields almost 25 percent.

The cost of insuring the debt of Europe’s most-indebted nations against default rose today on concern they will have to restructure. Credit-default swaps on Greece surged 66 basis points to 1,335, Ireland rose 20 to 630 and Portugal jumped 20.5 to 626, according to data provider CMA.

‘Soft Restructuring’

Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said a “soft restructuring” is possible for Greece after the government in Athens takes additional steps to cut the budget, such as state-asset sales. He spoke in an interview with Austria’s ORF, according to a transcript posted on the state broadcaster’s website today.

Soft restructuring, also referred to by EU officials as “reprofiling,” is a “pure extension of maturities of existing bonds without changing the principal and the interest rates,” German Deputy Finance Minister Joerg Asmussen said in Brussels yesterday. Such a setup would be designed to avert a chain reaction of claims linked to credit-default swaps.

Extra Measures

Getting bondholders to voluntarily accept delayed payments won’t be considered until Greece makes additional budget cuts and begins asset sales worth 50 billion euros, EU Economic and Monetary Commissioner Olli Rehn said in Brussels today.

Deutsche Bank AG and National Bank of Greece SA will advise the Greek government on asset sales, including extending the concession of gambling company Opap SA and the sale of a further stake in it, the Athens-based Finance Ministry said in an e-mailed statement today. Nine Greek banks were retained to advise on investment options for the country’s real-estate holdings.

“Privatization makes a real difference,” said Poul Thomsen, head of the IMF’s Greek mission, which is in the process of reviewing the country’s progress on the bailout conditions. “If targets can be met, it will make a change to debt sustainability.”

Stark said any restructuring would undermine the collateral Greek banks use to gain loans from the ECB and “this holds true for all kinds of restructuring.”

Bank Capital

“It’s an illusion to think that a debt restructuring or haircut or rescheduling would help resolve Greece’s problems,” he said. “A restructuring would wipe out part or all the capital of the Greek banks.”

Greek banks’ reliance on ECB liquidity dropped for a third straight month in March to 87.9 billion euros, the country’s central bank said on May 11. Greece’s government and central bank will extend 30 billion euros in additional guarantees, which will be contingent on banks detailing how they will wean themselves off ECB money.

The consequences of a Greek debt restructuring would be “dire,” leading to further credit-rating cuts and harming the country’s banks and economy, ECB Vice President Vitor Constancio told reporters today in Brussels.

The Frankfurt-based 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.

More Time

Still, Greece would have more time to carry out structural changes if its debt maturities were extended, Organization for Economic Cooperation and Development Secretary-General Jose Angel Gurria said in an interview in Brussels today. “Greece hasn’t had enough time to implement these steps,” he said.

Greece will detail more than 6 billion euros in spending cuts and revenue measures to meet the 2011 deficit target of 7.4 percent of gross domestic product over the next few days, Finance Minister George Papaconstantinou said in Athens today.

Eighty-five percent of international investors surveyed by Bloomberg last week said Greece will probably default on its debt, with majorities predicting the same fate for Ireland and Portugal. The European Commission said on May 13 that Greece’s debt will reach 166 percent of gross domestic product next year, the highest for any country in the euro’s history.

Bini Smaghi said dealing with the public finances of Greece, Ireland and Portugal is Europe’s “biggest challenge” in the years ahead.

“Time has been lost talking about how to come up with a way to reduce the debt, but if we accept this, we’ll jeopardize all of Europe.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE