ECB Constancio: Restructuring Could Increase Contagion Risk
FRANKFURT (MNI) – The troubled peripheral Eurozone countries of
Greece, Portugal and Ireland are clearly different from other Eurozone
states, but the market calculus could change should a restructuring of
Greek debt produce a contagion effect, European Central Bank Vice
President Vitor Contancio said Wednesday.
At a press conference where he presented the ECB’s Financial
Stability Review, Constancio noted the recent increase in spreads on the
sovereign debt of some other Eurozone countries. “I would not draw any
conclusion from what has happened over the past few days,” he said.
“There is a very clear-cut distinction between those three countries and
all the others.”
However some forms of private creditor participation in a new
Greece bailout package currently being negotiated could quickly change
the situation, he warned, adding that this was one of the reasons why
the ECB rejected the idea of a default in any guise for Greece.
He reiterated the ECB’s rejection of any sort of “default with a
haircut, or any form of private sector involvement [PSI] that can lead
to a credit event or a rating event.”
However, the ECB is “not against all forms of PSI,” he said, noting
that “some sort of Vienna type initiative could be conceived.”
The ECB is currently locked in a debate with Germany over the best
way to get some private sector contribution to the next Greek bailout.
Germany wants an agreement by which private institutions that hold Greek
bonds agree to exchange them for new debt with an extension on the
maturity of seven years.
The ECB opposes this, fearing it would look too much like coercion
and be considered — by rating agencies, financial markets and
creditors’ lawyers — as tantamount to default. Instead, the ECB has
said that something akin to the Vienna Initiative — used for Eastern
European debtor states in 2008-09 — might be acceptable. This involved
the voluntary rollover of debt as it matured.
However, Constancio made clear it was not up to the ECB to launch
such an initiative. “We were not the organization that proposed that a
PSI should be organized right now. So it is not up to us to organise
solutions,” he said. He added, however, that there “are certainly forms
that can achieve” private creditor participation without precipitating a
Constancio warned that the impact on Greek banks were there to be a
default or partial default on sovereign Greek debt would be “quite
dramatic,” though he declined to estimate the financial impact and
reiterated that the ECB doesn’t think there will be that kind of
“If there would be something that we don’t believe will happen,
that of course will impact the collateral of all the banks that have
presented Greek government paper as collateral,” he cautioned.
Constancio asserted that financial conditions and the financial
sector in the Eurozone have improved, and this has “helped the economic
recovery that is also ongoing.”
But the euro area still faces grave challenges, he said, citing as
the most pressing risk the “interconnection of the sovereign debt crisis
and the financial system. This is at the core of the challenges of
financial stability that we face.” This was also highlighted in the
Financial Stability Review as the biggest threat facing EMU.
However, “in spite of these problems that we face, we do not
anticipate that it will derail the recovery,” Constancio said. “That is
reflected in the [economic] projections…and it is our main scenario.”
He said the threat must be tackled in two ways. The first is the
EU/IMF fiscal and economic adjustment programmes in Greece, Ireland and
Portugal, coupled with liquidity assistance.
The second action needed is to “recapitalize, restructure and
increase the transparency of the financial sector and take advantage of
the forthcoming stress tests to clarify the situation of the banks in
Europe and when there is the need to recapitalize to respond to problems
that the stress tests may reveal.”
He urged the three countries under EU-IMF programmes to implement
them fully. “These programs will strengthen the fundamentals of these
markets and the aim of course is that markets down the way will
recognize that,” he said.
Constancio elaborated on one of the risks highlighted in the ECB’s
report, namely the possibility of an unexpected global increase in
long-term interest rates that could hit bank profitability and economic
“It may be related to sovereign debt in advanced economies,” and
could also result from a decline in the savings rate in emerging
economies over the longer term, which would “also affect long-term
interest rates,” he said.
But he downplayed the risk, saying that, “it is certainly a risk
that we identify and point to, but it is not present now.”
Constancio dismissed the notion of a “mini-default” in the United
“I don’t now exactly what is meant by this mini default. A default
of any size is not anticipated regarding the U.S.,” he said. “The risks
that some highlight is that yes the medium and long term yield may go
up, so the valuation of debt instruments may come down.”
Constancio also attested to an improvement in the situation of
large banks compared to the crisis years 2008-2010.
“The improvement in the economic situation is reflected in lower
levels of loss provision, and that of course helps the profit and loss
accounts of the banks,” he said. He noted that capital ratios had also
improved, “so both profitability and robustness of these banking groups
However, profitability is not yet back to pre-crisis levels and may
not get there anytime soon, he cautioned. “Nevertheless, it is a healthy
situation that has developed in Europe.”
–Frankfurt Newsroom, +49-69-720-142; email@example.com