23rd Jan 2020

ECB warns of threat to Greek democracy

  • ECB: Restructuring would be a catastrophe (Photo: danoots)

Greek debt costs were bludgeoned on Thursday (15 April) after news filtered through markets that the German finance minister, Wolfgang Schaeuble, came out publicly saying that a restructuring of the Hellenic republic's debts may be required.

Separately, the European Central Bank has warned that such restructuring - default by another name - would threaten Greek democracy.

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Insuring Greek bonds for five years jumped to 1100 basis points, a record for the heavily indebted country. The clobbering came after Schaeuble told Die Welt, a domestic newspaper, that "further steps" would be needed if analysis showed Athens was unable to service its debts.

"In June we will get a progress report. I'm expecting a detailed analysis on the debt sustainability of Greece, that will be done in consultation with the commission and the ECB," he told the paper. "If this report concludes that there are doubts about the debt sustainability of Greece, something must be done about it."

"Further steps will have to be taken," he added, stressing however that "restructuring could only take place on a voluntary basis."

A voluntary restructuring, taking the likely form of an extension of the payment period or a reduction in the interest rate or a combination of the two, would require the agreement of lenders.

The minister's comments came after reports filtered out of Germany on Saturday that a number of eurozone finance ministers had held a conference call on the subject with European Central Bank president Jean-Claude Trichet. According to a Der Spiegel report, the ministers suggested that Greece is not likely to meet its debt reduction targets and may need to restructure. However, the ECB chief would not consider the idea.

The frank words follow a spreading consensus that the Greek economy is in a tail-spin - GDP is predicted to slump by three percent in 2011 after a 4.5 percent decline last year.

Analysts say that an ever restrictive fiscal policy has combined with an inability to overcome ingrained tax evasion to produce a feeble economic situation where the country's debt pile is the only thing that is growing.

Despite the shock to the system, as early as last May, both Schaeuble and the German chancellor had mentioned the need to allow the "orderly" default of overburdened eurozone states.

At the time, Schaeuble spoke of "the possibility of a restructuring procedure in the event of looming insolvency that helps prevent systemic contagion risks."

Athens for its part still insists that such a move is unnecessary. Athens sources concede that it is likely that discussions on the subject are taking place while insisting no Greek representatives are taking part.

"We do not agree with the debt restructure idea. We can create new job positions and focus on investments instead. We will not be changing course," Greek finance minister George Papaconstantinou said on Wednesday.

The European Commission publicly is also insisting that restructuring is not an option while European Council President Herman van Rompuy has dismissed such talk as a "magical solution" that must be avoided. The worry is that the move could not be isolated and would quickly entangle other heavily indebted peripheral economies.

EU economics chief Olli Rehn on the weekend ruled out restructuring. Nevertheless, one report out of Greece, from weekly Kefaleo suggests that he, like Berlin, is in reality in favour of a "voluntary agreement" between creditors and Athens.

But there is far from any consensus amongst European decision-makers. The ECB is strongly opposed to any restructuring.

ECB board member Lorenzo Bini Smaghi warned on Thursday: "According to our analysis, a debt restructuring would result in the failure of a large part of Greece's banking system."

He did not mince his words, saying that Greek democracy would be threatened by such a move.

"The Greek economy would be on its knees, with devastating effects on social cohesion and the maintenance of democracy in that country," he told financial daily Il Sole 24 Ore.

He also subtly told Berlin to not push Athens into a corner.

"Ultimately it's up to Greece to decide the way forward, given that it will suffer the worst consequences. But other countries must avoid pushing it towards a catastrophe."

But a mirror image of the discussion coming out of Berlin is occurring in Greece as a growing number of members of the governing Pasok party are publicly backing restructuring as an alternative to further austerity, with the public discourse openly considering the merits of a more thorough-going default.

MP Vasso Papandreou, the head of the parliamentary economics committee has said he does not back ‘haircuts' on senior debt, "but perhaps a repayment extension since the situation is going nowhere,"

"We keep taking measures as if we are in a vicious cycle."

Some 55 percent of the public back some form of restructuring, according to a poll last week while the idea of a ‘debt audit', producing an assessment that separates legitimate debt from ‘odious debt' that would be rejected is gathering support.

The government rejects the concept as "science fiction" that would lead to Greece being kicked out of the euro.

Indeed it is precisely such more disorderly or debtor-led default that Berlin is likely trying to avoid by backing restructuring.

Banks in Germany and France remain in a weak state and any restructuring must be carefully crafted so as to prevent aftershocks elsewhere in the eurozone or even a disorderly panic.

Any restructuring in Greece would immediately provoke a reassessment of risk in other peripheral states while Germany's Commerzbank, France's Credit Acricole and Belgium's KBC among others still have significant Greek government debt holdings.

The key is to enable Greece to continue to pay back its debt while preventing too profound a haircut on core-eurozone debt holdings.

Presented with too large a loss, the holders of the debt would themselves have to turn to their own governments for support, transmitting the banking-sovereign crisis to the core of the EU.

€23 billion in fresh austerity

Meanwhile, the government is set to unveil €23 billion in fresh austerity measures on Friday both as part of ongoing efforts to reduce the country's debt pile and to convince markets that restructuring is unnecessary.

Once the three-year plan of cuts are presented to ministers, many of whom have openly begun to rebel against the prime minister's austerity efforts, they must then be put before parliament sometime before 15 May, with a vote expected in early June. The government is to unveil the broad outlines of its plan on Friday, with details released bit by bit over the coming days.

However, recognising that Greek citizens have just about reached the limit of what can be swallowed, the government has sworn that there will be no further cuts to pensions or wages.

Athens is to propose what it is calling a "complete restructuring of the public sector" and a crack-down on corruption and tax evasion. Throughout the public sector, non-performing entities that the government argues are the product of decades of clientelism are to be shut down.

It is not at all certain however that the measures will pass.

The government is expecting a critical reception from a majority of MPs, although the spin is that these deputies are merely feeling the need to distance themselves from Athens but in the end agree on the substance of the proposals and will ultimately vote in favour as they know that there will be an election if the measures are defeated. Polls suggest at this point a hung parliament in such an event.

The key, according to sources close to the government, is to present the new measures slowly, so as not to further provoke the "average Greek".

At the same time, beyond the government's control, Athens privately fears that the trade unions could "block everything".

The move comes atop a separate €50 billion privatisation effort.


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