ECB Bini Smaghi: ‘Soft’ Greek Restructuring Would Be Disaster

Author: Market News International | Category: News

SINGAPORE (MNI) – Talk of restructuring Greek debt is damaging the
European economy and any action, even a so-called “soft” restructuring,
would be disastrous, European Central Bank executive board member
Lorenzo Bini Smaghi said in an interview with the Financial Times.

According to the transcript of the interview, Bini Smaghi said
restructuring would be unfair to European taxpayers and would lead to
contagion effects for other Eurozone countries.

“A debt restructuring, or exiting the euro, would be like the death
penalty — which we have abolished in the European Union. On top of
that drastic measures such as a default or restructuring would produce
contagion effects in other countries and affect taxpayers in the other
countries. Why should they pay for the mistakes of others?” he was
quoted as saying.

“Restructuring can be orderly, or even beneficial for investment
banks and lawyers, but not for the Greek people. It would entail a major
economic, social and even humanitarian disaster, within Europe. Orderly
implies things go smoothly, but if you wipe out the banking system, how
can it be smooth?”

If creditors were offered terms to “voluntarily” lengthen the
maturity of the debt they held, the implications would be that they
would lose more if they refused, Bini Smaghi said.

“Then it is not voluntary but a forced restructuring, which would
trigger a series of credit events, CDS payments, so it is in all
respects a restructuring. So ‘soft restructurings’, ‘re-profilings’ do
not exist. They are catchwords that politicians have tried to use, but
without any content.”

Asked what right the ECB would have to block such an attempt, he
replied: “We’re not blocking – we’re saying that it will not work.
There is no difference between soft restructuring and restructuring, the
impact will be the same. Then we will be a situation in which we
(the ECB) will not be able to accept the relevant collateral.”

He said that a restructuring would not solve the problems in the
Greek economy, “On the contrary it would push Greece into a major
economic and social depression.”

In other comments, Bini Smaghi repeated that Eurozone interest
rates need to rise at some point, even though commodity price inflation
seems to have eased since the last rate rise in April.

“We have never really reacted to short term developments. We have a
medium term orientation. It may be that we have seen some adjustments in
commodity prices. But if you look over the medium term, keeping in mind
the recovery in the economy, the very low level of interest rates that
we have does not seem fully justified. A process of adjustment is
required if the economy continues to grow.”

On Saturday, Governing Council member Nout Wellink said a Greek
debt restructuring would have an impact on the ability of
the European Central Bank to conduct its normal refinancing operations.

Speaking during a panel discussion on financial stability, the head
of the Dutch National Bank said that “in case of a very substantial
haircut” on Greek debt in the context of a restructuring, there might be
“an impact of course on the volume of collateral the Greek banks would

“And having said that, you all know that in our operations, our
refinancing operations, we need sound counterparties,” he observed. “And
Greek banks might be impacted by a restructuring, and it might be that
under those circumstances it might be necessary to recapitalize them.”

Wellink continued: “But from the perspective of the ECB we need
sound counterparties and adequate collateral… Insofar as a
restructuring has an impact on these two… it has an impact on the
operations of the ECB, that is self-evident.”

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