ECB’s Stark Heaps Pressure on Governments to Find Greek Solution

European Central Bank Executive Board Member Juergen Stark
European Central Bank executive board member Juergen Stark. Photographer: Michele Tantussi/Bloomberg

European Central Bank Executive Board member Juergen Stark heaped pressure on politicians to find a solution to the sovereign debt crisis at a summit tomorrow that doesn’t involve any form of Greek debt default.

Stark told Germany’s Boersen-Zeitung newspaper that governments agreed last month to avoid a selective default and urged them to stick to that commitment. He also said the Frankfurt-based central bank won’t change its rules or take on any more risk if the private sector is involved in a Greek bailout. The ECB confirmed the remarks.

“I expect state and government leaders this week to stop fiddling and give a clear signal to markets -- you can rely on Europe,” Stark said. “Europe is at a crossroads. What the leaders decide at their summit will have a medium to long-term impact on the functioning of the currency union.”

European leaders meet in Brussels tomorrow to hammer out a second Greek aid package and stem a 21-month debt crisis that is now threatening to engulf Spain and Italy. The main sticking point is how to get bondholders and banks to foot a share of the bill without triggering a default.

While Germany is reluctant to keep forcing its taxpayers to support Greece and has signaled a restructuring may be unavoidable, ECB President Jean-Claude Trichet says any default risks sparking a meltdown on a par with the collapse of Lehman Brothers Holdings Inc.

ECB Rules

“Whoever wants to involve private creditors in the solution must be aware of the consequences,” Stark said. “At the end of the day, the involvement of the private sector could be even more costly to taxpayers than going without it” as it may result in governments having to recapitalize Greek banks.

Stark reiterated that the ECB won’t accept defaulted Greek government bonds as collateral. “We won’t change our rules and we won’t increase our risk because of the possible involvement of private creditors,” he said.

It’s “technically possible” to involve the private sector without triggering a selective default or a default, Stark said, noting that the ECB has called for the European Financial Stability Facility to be given the power to purchase bonds on the secondary market. Even then, there’s no guarantee that markets wouldn’t view this as a credit event, he said.

Stark said that in June, governments “decided to avoid a selective default.” They should not now engage in “political yo-yoing,” he said. “Our assumption is that the governments hold to what they have decided.”

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