ECB economist wants end to 'fruitless' debate on Greek aid.

10th June 2011, Comments 0 comments

European Central Bank chief economist Juergen Stark called Friday for an end to what he called a "really fruitless discussion" on private sector involvement in a second Greek rescue package.

"I think it's time to stop this really fruitless discussion and to concentrate on the real issues," Stark told reporters on the sidelines of a banking conference in Frankfurt.

"The real issue is the programme for Greece and to implement the programme in full," he added.

Greece already benefits from one rescue package worth 110 billion euros ($160 billion) backed by the European Union and International Monetary Fund but will probably need another 90 billion to cover its debts in the next couple of years.

Athens is expected to reform its economy, cut spending and sell state-owned assets to qualify for each allotment of the EU/IMF loans, but has fallen behind in its commitments.

The economist spoke in reference to a dispute between the ECB and Germany in particular, which wants private investors to participate along with taxpayers in a mooted second plan to rescue Greece.

The ECB rejects this position because it says that it would result in heavy losses by banks in Greece and elsewhere and trigger a de-facto default that would roil financial markets.

A declaration of default by international ratings agencies would mean that the central bank could no longer accept Greek goverment bonds as collateral against loans, which would choke off crucial funding to struggling commercial banks.

"This prevents us from continuing accepting Greek bonds as eligible collateral," Stark said, "it's as simple as that.

"For this reason policymakers should know what they are talking about" when they insist on actions that might have unforeseen consequences, the economist concluded.

The ECB economist also commented at length on a recent discussion over whether the central bank has taken on excessive risk by buying bonds issued by Greece, Ireland and Portugal and by accepting risky securities as collateral.

"We are neither naive nor ignorant of what's going on in the markets, and the risks on our balance sheet," he said.

Public commentary by academics and financial analysts that were "based on the size of the ECB's capital alone is misleading," he maintained.

"Attribution of exposures of monetary policy operations to the ECB would be fundamentally wrong because the implementation of monetary policy is with (national) central banks," which share the risk along with the ECB, Stark said.

"It is inappropriate to single out the ECB," he argued.

That said, the economist acknowledged that whether the ECB or national central bank booked losses on securities issued in peripheral eurozone countries or sovereign bonds, in the end the bill is always laid at the public's door.

"It is always taxpayer money," Stark said. "We are fully aware that it is taxpayer money."

© 2011 AFP

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