FRANKFURT (MNI) – Sovereign debt restructuring “should be the last
resort” and should only be implemented when it is clear that a debtor
country cannot repay its debts, European Central Bank Executive Board
member Lorenzo Bini Smaghi said Monday.
Greece, however, is solvent as long as it is prepared to sell
assets and push ahead with required reforms, Bini Smaghi said.
In a speech entitled “Private sector involvement: from (good)
theory to (bad) practice”, Bini Smaghi once again warned against any
restructuring of Greek debt, saying it would be too costly for both the
debtor and creditors.
On one hand, “having the private sector actively involved in
preventing and resolving sovereign crises is a good idea,” Bini Smaghi
conceded. “However, the practical implementation of this idea is fraught
with complications and, if done unwisely, may actually be very damaging,
and turn out to be more costly for taxpayers,” he warned. “The events of
recent months seem to confirm my views.”
Bini Smaghi argued that, “the capacity to service debt requires
both a willingness and an ability to implement policies that will
generate the necessary resources.”
With regard to Greece, he noted: “It has a gross debt of around
E330 billion and marketable assets worth up to E300 billion, so the
country is solvent to the extent that it is willing to sell off some of
these assets.”
Although privatization and reforms will be painful, the “economic,
financial, social and political costs of implementing the needed
adjustments” would be lower than those associated with a default, Bini
Smaghi argued.
European authorities are working on a second bail-out for Greece
with Germany pushing for private sector involvement in any additional
program. The European Central Bank said it is open to a voluntary
involvement of creditors but rejects any measures that would be
interpreted legally as a default of any kind.
“Imposing haircuts on private investors can seriously disrupt the
financial and real economy of both the debtor and creditor countries. It
ultimately damages the taxpayers of both the creditor and debtor
country,” Bini Smaghi warned.
In fact, he argued that a default may well not help save taxpayers
money as has been suggested by Eurozone governments pushing for a soft
restructuring. It actually “may cost them more money.”
He also warned of severe contagion risk to other weak Eurozone
member states, arguing that restructuring would feed speculative
behavior. “Given that markets are forward-looking, they would try to
anticipate any difficulty faced by a sovereign by short-selling their
positions, thus triggering the crisis,” Bini Smaghi said.
Apart from the immediate adverse impact on Greece — such as the
likely collapse of the banking system as banks lost access to ECB refi
funds — restructuring would also delay any new investment in Greece
even further, be argued.
In Greece “reform fatigue set in at an early stage and it probably
went unnoticed for a while,” Bini Smaghi observed. Going forward, states
under IMF/EU programmes “have to remain firmly committed to very
specific measures” and “monitoring has to be strengthened.”
–Frankfurt bureau tel.: +49-69-720142. Email:jtreeck@marketnews.com
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