FRANKFURT (MNI) – A sovereign default in advanced economies is
unnecessary, undesirable and unlikely, European Central Bank Executive
Board member Lorenzo Bini Smaghi said on Wednesday.

If, however, “some form of rescheduling or re-profiling of the debt
over time turns out to be necessary for the debt to be sustainable, this
can be achieved in an orderly way only through an agreement between
creditors and debtors,” Bini Smaghi said.

Although Bini Smaghi spoke generally of a potential future crisis
management system for the Eurozone and made no reference to Greece, it
is worth noting that he allowed for the possibility of renegotiating
public debt in the common currency region.

“The adoption of collective action clauses by the euro area member
states would make it easier for creditors and debtors to agree on a fair
burden-sharing. This was the conclusion of the discussions in the
context of the IMF and can be further explored at European level,” Bini
Smaghi said.

In the search for future crisis management mechanism that does not
bail out bond investors, it would be an option “to use the funds made
available from the official support mechanism to purchase debt on the
secondary market, at the prevailing market discount, rather than
reimbursing the maturing debt at the nominal value,” he noted.

“In this way, holders of debt instruments willing to sell would
have to accept the market haircut. This possibility is envisaged in the
ECB’s proposals,” Bini Smaghi said.

Bini Smaghi warned that if debt restructuring were “too easy, or
too ‘orderly’ — to use a fashionable term — market participants may
consider it the easy way out for countries and might be tempted to take
speculative positions from which they would profit in case of default.”

“In other words, a restructuring mechanism, if too simple, could
lead to moral hazard. Furthermore, the very nature of the markets would
mean contagion spreading immediately to the other countries, as
participants would start guessing which other country might need to
undergo restructuring,” he said.

Bini Smaghi also reiterated his view that “it naive to think that
there is such a thing as an orderly debt restructuring mechanism.”

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

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