FRANKFURT (MNI) – A future Eurozone rescue mechanism should neither
automatically involve the private sector nor force a government to
default on its debt, European Central Bank Executive Board member
Lorenzo Bini Smaghi said in an interview with Greek newspaper
Kathimerini.

In an English version of the interview released by the ECB on
Saturday, Bini Smaghi also noted that a sovereign bankruptcy would be a
very painful process, especially in the case of Greece. But he stopped
short of excluding the possibility of debt restructuring, allowing that
it might be necessary if a country simply could not pay its debt.

“We want the mechanism to enhance stability and not to attract
speculation against countries experiencing difficulties,” Bini Smaghi
said. The ECB has lobbied against German proposals for an orderly
default mechanism that links financial assistance to debt restructuring
and explicit private sector involvement. The proposals have contributed
to the most recent market tension, which has sent peripheral bond yields
spiraling, particularly for Ireland and Portugal, once again raising the
specter of contagion to countries like Spain and Italy.

“As is the case with the IMF, the participation of the private
sector should not be automatic. Neither should we force a country to
declare itself bankrupt if it’s not willing to do so and if it’s able to
repay its debt. These are the two conditions that will prevent
speculation,” Bini Smaghi said.

He argued that the German government’s aim of taking taxpayers off
the hook in future sovereign bailouts can be achieved by other means.

“Take a look at the IMF’s experience in the past few years. It has
offered financial assistance to countries which have eventually repaid
their debt. The IMF has never lost money, which means taxpayers have
never lost money,” he noted.

A country facing difficulties refinancing via the markets and which
“is determined and is able” to implement strict adjustment programs
should be offered assistance, Bini Smaghi said. Only if a country is
absolutely not in a position to repay its debt, “for instance because it
is not able to implement a sufficiently large primary surplus, will debt
have to be restructured,” he said.

Perhaps tellingly, Bini Smaghi noted that generating such a
sufficiently large primary surplus is one area in which the Greek
efforts have not thus far produced great results. “Attempts to increase
revenue have so far been problematic, and it is important to tackle tax
evasion,” he said when asked about risks and achievements of the Greek
program.

While “many steps have been taken in the right direction,” Greece
must now focus on 2011 and must “achieve its objectives in order to
regain credibility,” Bini Smaghi said.

While in 2010 the initial target was not fully achieved because the
2009 deficit revision had an impact on the deficit of the following
year, “any discussion about changing targets will lead to a loss of
credibility,” he cautioned. The same goes for “other discussions, such
as the renegotiation of loan terms.”

He once again dismissed arguments that even if Greece implements
the programme in full, its debt won’t be sustainable in the end or that
defaulting would be in the interest of the Greece.

“I find this analysis superficial and stupid,” Bini Smaghi said.
“If a country were to go bankrupt, even partially, then all of its
commitments, in the form of guarantees, would be impaired. This would
mean, especially in the case of Greece, that the banking system would
also go bankrupt — a severe blow to everyone. This would be very bad,
national wealth would decline. You only resort to that if the situation
is desperate.”

–Frankfurt newsroom +49 69 72 01 42; Email: jtreeck@marketnews.com

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