German crisis fund plans 'recipe for disaster': ECB official

10th November 2010, Comments 0 comments

A top European Central Bank official has attacked German proposals for an "orderly default" of eurozone nations, saying plans to make private banks bear resulting losses were a "recipe for disaster."

In an opinion piece for Thursday's edition of German weekly Die Zeit, Lorenzo Bini Smaghi, a member of the ECB's six-person Executive Board, said the German proposals, intended to calm markets, would have the opposite effect.

Making private sector investors who buy government-issued bonds absorb losses would "in practice lead to a destabilisation of the markets and have serious consequences for the eurozone economy," Bini Smaghi wrote.

"One cannot on the one hand argue that markets are moved by greed and should be punished for their misbehaviour and at the same time make them solely responsible for assessing the creditworthiness of countries.

"Such a process would be a recipe for disaster," said the central banker.

He also warned that the banking system in any country threatened with bankruptcy could "collapse" if it is being supported by the state. "The social and political consequences of such a development are inconceivable."

European leaders agreed at their last summit in October to revisit in December the issue of a permanent crisis fund to replace the 440-billion-euro (607-billion-dollar) European Financial Stability Fund that expires in 2013.

Berlin pushed at the summit for a procedure to be drawn up in case a eurozone country goes bankrupt, insisting that bondholders should take their share of the costs rather than the public picking up the tab.

Merkel reiterated during a speech last week in Belgium that taxpayers should not be the only ones to step up to the plate when financial markets are struck by "new mistakes and bad behaviour."

© 2010 AFP

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