Germany backs ECB line on Greece, floats fresh approach
German Finance Minister Wolfgang Schaeuble edged on Thursday towards the European Central Bank's hard line against a restructuring of Greek debt, but said new ideas were needed to help Greece grow out of its crisis.
The aftershocks of what financial markets would consider a Greek default "would be far too severe at this point," Schaeuble told German business daily Handelsblatt in an interview, echoing the point of view held by ECB directors.
Schaeuble had suggested previously that a so-called "soft" restructuring of Greece's 340 billion euros ($480 billion) in debt might be possible once Greek authorities had shown they were getting to grips with the problem.
"Soft" restructuring, sometimes repackaged as "reprofiling," is a notion that might involve an extension of the debt reimbursement period or a lowering of interest rates applied to it.
Markets are convinced that would eventually lead to a "hard" restructuring, under which a substantial part of the money Greece has borrowed would not be paid back.
ECB directors, including chief economist Juergen Stark and new Bundesbank chief Jens Wiedmann staunchly oppose restructuring because it could demolish investor confidence in Greece and other eurozone countries such as Ireland and Portugal.
The ECB holds around 45 billion euros' worth of Greek bonds and would be hit hard by any "hard" restructuring, but bank officials also say it would be wrong to signal it would assume problems caused by poor national economic policies.
Wiedmann said on Thursday in the Frankfurter Allgemeine Zeitung newspaper that "as a matter of principle the consequences of finance policy mistakes must not be passed on to central banks.
Political leaders, such as Schaeuble and German Chancellor Angela Merkel, have argued meanwhile that restructuring would force private investors like banks to share any losses on Greek debt with taxpayers.
Stark and others, like Moody's Investors Services, warn that investors would be alarmed by Greek losses and pull out of the country, provoking a collapse of the banking sector and government that could spread to other countries.
Schaeuble echoed on Thursday a prior warning by Stark that Greek bankruptcies could have "more dramatic consequences than the collapse of Lehman Brothers," the US investment bank that went under in September 2008.
That triggered a sharp worsening of the global financial crisis because interbank lending markets quickly froze up.
The ECB economist and Wiedmann have raised the stakes by declaring that a Greek debt restructuring would lead to Greek bonds being rejected as collateral for central bank loans, which would cut off essential funding for Greek banks.
With the ECB and Berlin seemingly on a collision course, Schaeuble's remarks to Handelsblatt, which stressed support for the central bank's independence, could help ease widely-noted tension.
"Germany is defusing the conflict with the European Central Bank," Berenberg Bank chief economist Holger Schmieding commented.
Barclays Capital economist Frank Engels added that "the German government would not want to risk an open conflict with the ECB," the most stable body keeping Greece's debt woes from erupting into an existential eurozone crisis.
Meanwhile, Schaeuble offered some ideas on ways of encouraging the economic growth Greece needs to become solvent again.
"Budget discipline measures by themselves cannot resolve the problems" faced by Athens, the German finance minister said.
"There must be medium and long-term growth prospects," such as foreign investments in solar energy and electric power networks, he added.
© 2011 AFP