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Monday 5 December 2016

ECB clashes with politicians over 'soft restructuring' of state debt

Published 19/05/2011 | 05:00

IMF deputy managing director Nemat Shafik talking with the
president of the Eurogroup Jean Claude Juncker at the
ecofin meeting at the EU Council in Brussels
IMF deputy managing director Nemat Shafik talking with the president of the Eurogroup Jean Claude Juncker at the ecofin meeting at the EU Council in Brussels

THE European Central Bank (ECB) was on a collision course with political leaders last night over efforts to solve the debt crisis.

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The ECB rejected calls to allow Greece more time to pay back its government debt.

Yesterday, the prime minister of Luxembourg Jean-Claude Juncker said Greece could go through a "soft restructuring" if the government in Athens took extra steps to cut its budget.

A soft restructuring, dubbed "re-profiling" the debt, involves giving the country more time to pay off its debt but no change to the amount that has to be paid back.

"We will have to tackle the question as to whether there couldn't be a soft restructuring of Greek debt in the sense that an extension of the maturities regarding debt and a lowering of the level of the interest rates could be sought," Mr Juncker said. "Greece must not become a black hole."

EU commissioner for economic and monetary affairs Olli Rehn said asking bondholders to accept being paid back more slowly could be considered, but only if Greece made extra budget cuts and sold government-owned assets.

Politicians think Greece could avoid what many see as an otherwise inevitable default if lenders agree to allow the country more time -- possibly 20 or even 50 years -- to pay back its debts.

The country would continue to pay interest at the agreed rates, which is less than it would pay to borrow today.

Lenders would be hit because their capital could be tied up for a generation, but under accounting rules they would not have to write down the value of the debt they hold. That means governments in the likes of France and Germany would have less to fear from having to fund bank recapitalisations.

However, ECB executive board member Juergen Stark rejected the plan.

"A Greek debt restructuring is not the appropriate way forward -- it would create a catastrophe because it would damage the banking system," Mr Stark said.

Incoming ECB official Lorenzo Bini Smaghi said "a solution for reducing debt but not paying for it will not work".

Volatility

"One reason the ECB is unhappy about the idea is because the ECB holds a lot of Greek debt," Evolution Securities analyst Elizabeth Afseth told the Irish Independent.

The ECB bought those bonds after European politicians ordered the bank to intervene to "smooth out" volatility in the bond market.

It did so by buying €76bn of Greek, Irish and Portuguese government bonds.

Ms Afseth said the central bank may also be concerned that letting Greece term-out its debt would reduce the pressure on the country to follow through with politically unpopular spending reforms.

Still, the ECB approach is increasingly at odds with political leaders.

The institution is already at odds with Ireland and the International Monetary Fund (IMF) for failing to come up with a plan to lend to Irish banks over the medium term as a first step to getting back to the market.

Meanwhile, Portugal sold €1bn of short-term government debt yesterday at an average interest rate of 4.657pc.

The price it had to pay surprised many. It is more than the 4.06pc Greece paid for the same type of debt on Tuesday. It is also more than Portugal paid for a similar debt deal earlier in the month, before investors had the comfort of the EU/IMF bailout.

Market sources said the latest deal may have suffered because Portugal's own banks hold so much government debt they were reluctant to buy more, limiting demand. (Additional reporting, Bloomberg)

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