Greece’s debt problems can be solved by a Brady bond-style rescue operation in which Greek government bonds are swapped against debt issued jointly by euro-region members, said German government adviser Peter Bofinger.
Joint euro-region bonds would be helpful for Greece because they would carry a very low interest rate and they would be good for banks because lenders would receive AAA-rated bonds in exchange for lower-rated paper, he said in a Bloomberg Television interview in Munich today.
“Sooner or later we have to come to the euro bonds,” Bofinger said. “There is definitely no alternative to the instrument and it would really improve the situation considerably.”
Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-region finance ministers, said on May 12 that joint euro-area bond issuance is a “reasonable” proposition whose time will come. German Finance Minister Wolfgang Schaeuble rejected the idea as recently as May 18.
Brady bonds, named after then U.S. Treasury Secretary Nicholas Brady, enabled 17 countries in Latin America, Africa, Asia and Eastern Europe to swap bad loans for new debt starting in 1989, some of which was backed by zero-coupon U.S. Treasuries.
While debt restructuring is “off the table” because of the domino effect on European markets, alternatives such as a Vienna Initiative program, which arrested contagion in Eastern Europe, are being considered, European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an interview yesterday at Bloomberg headquarters in New York.
The Vienna-style plan would aim to persuade creditors to buy new bonds from the Greek government when existing ones mature.
“My approach would be more a kind of a Brady-bond approach that one offers an exchange of Greek bonds against EU bonds,” said Bofinger. Still, Chancellor Angela Merkel and other EU politicians “lack the political will for a really bold solution that is required,” he said.
Saddled with Europe’s heaviest debt load, Greece is seeking additional loans after last year’s 110 billion-euro ($158 billion) European-led package was insufficient to plug its fiscal hole.
European Central Bank officials have said the “reprofiling” of Greek debt that’s also being considered by Rehn is tantamount to default and would prompt the Frankfurt-based central bank to refuse to accept Greek bonds as collateral in their emergency funding operations, wiping out the capital of the Greek banking system.
“I think the ECB might have to reconsider its position because if we just do nothing, if we just let the debt pile up, the risk could be that more and more debt is piling up in the ECB’s balance sheet because, more or less, the ECB is the lender of last resort,” said Bofinger.
The EU needs to find “comprehensive approaches” to deal with the crisis, Bofinger said. The current wait-and-see approach in a bid to buy time “will not succeed,” he said.