German central bank head wary of bond buy-back plan

13th July 2011, Comments 0 comments

German central bank chief Jens Weidmann feels buying Greek bonds to relieve Athens' debt burden could have dangerous side effects, although the finance ministry says such a move is possible.

"That would have high costs, a low benefit and dangerous side effects as a consequence," Weidmann, who is also a member of the European Central Bank governing council, told the weekly Die Zeit Wednesday in an interview.

His remarks were released in advance of the interview's publication on Thursday.

Finance ministry spokesman Martin Kotthaus told a news conference in Berlin meanwhile that "it is already now theoretically possible for a state to receive financial aid and then to use some of this to buy back its debt."

That idea has been floated again as a way of helping Greece cut debt of around 350 billion euros ($490 billion), a millstone that is dragging the 17-nation eurozone deeper into crisis.

The idea would be for the European Financial Stability Fund (EFSF) to lend Athens money to be used to buy bonds it had previously issued, at a discount, and then cancel them, thus cutting its debt burden.

Weidmann also told Die Zeit that "the concert of voices that has expressed opinions in recent weeks, and not only about the private sector involvement (in a Greek bailout) - has not helped instill confidence in politician's ability to resolve their problems."

Germany has been one of the countries criticized by investors in the past for releasing seemingly contradictory comments.

"To lift any uncertainty, eurozone member states must now, urgently, show they are able to act," the Bundesbank chief told Die Zeit.

He took over at the central bank on May 1.

Weidmann said that seeking ways for the private sector to bear some of the cost of a second Greek bailout, estimated at at least 110 billion euros, carried "more risks than opportunities."

Private sector involvement has been repeatedly called for by German politicians concerned about a possible public backlash against a second financial rescue package for Greece.

Widespread discussion of such involvement led last week to a sharp downgrade of Portugal's debt by the international ratings agency Moody's, provoking a contagion effect that has now snared Italy, a much bigger eurozone economy, as well.

Weidmann warned that eurozone ""needs to have a plan to contain the threatening contagion effects should the Greek program collapse."

Germany is already the biggest single donor to an initial rescue plan set up by the European Union and International Monetary Fund worth 110 billion euros.

© 2011 AFP

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