FRANKFURT (MNI) – Instituting an automatic penalty for bond holders
in a future EU crisis resolution mechanism would destabilize markets and
have grave consequences for the Eurozone, European Central Bank
Executive Board member Lorenzo Bini Smaghi argued Wednesday.
Although this element of a crisis mechanism, championed by Germany
and supported by France, “might seem attractive from a theoretical point
of view, in practice it would destabilize markets and have grave
consequences for Eurozone economies,” Bini Smaghi said in an opinion
piece for German weekly Die Zeit.
Under such rules, investors would have an incentive to take
speculative positions against a country likely to apply for aid from the
crisis mechanism, the central banker argued.
Instead of encouraging a country to take timely action so as not to
need financial assistance in the first place and thus retain the
confidence of investors, this situation would precipitate a crisis, he
warned. “Moreover, the crisis would spill over to other countries, since
speculators could expect them to restructure their debt as well.”
Despite repeated criticism from the ECB, German public officials
are standing behind their proposal to make bondholders contribute to the
costs of any future bailout, through a restructuring of the debt they
hold.
“To overcome the crisis in the Eurozone, we need to reform the
Stability and Growth Pact and adopt a robust crisis mechanism that holds
private creditors liable and not the taxpayer alone,” Economics Minister
Rainer Bruederle said Wednesday in a press release.
–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com
[TOPICS: M$$EC$,M$X$$$,M$$CR$,MGX$$$]
