FRANKFURT (MNI) – European Central Bank Executive Board member
Lorenzo Bini Smaghi reiterated his opposition to the idea of governments
defaulting on or restructuring public debt, arguing that such actions
would lead to further loss of confidence.

In an opinion piece published in Friday’s edition of the Financial
Times, Bini Smaghi noted the argument of some observers that
restructuring would help to make a country’s debt burden more
sustainable and ease the pressure to implement overly restrictive fiscal
policies.

However, the central banker stressed that such an action may not be
in the best interests of the public, saying that “the cure could do more
harm than the disease.”

“As recent events have shown, the simple fear of a default or of a
restructuring of public debt would endanger the soundness of the
financial system, triggering capital flight,” Bini Smaghi said.

“Without public support, the liabilities of the banking system
would ultimately have to be restructured as well,” he continued. “This
would lead to a further loss of confidence and make a run on the
financial system more likely.”

Bini Smaghi stressed that many fail to realize that the burden of a
government defaulting on or restructuring its debt would fall on its own
citizens, “especially the most vulnerable ones.”

“They would suffer the consequences most in terms of the value of
their financial and real assets,” Bini Smaghi warned.

Bini Smaghi pointed to the awareness that countries recognized the
need to avoid “quick-fix” strategies” and that it was less costly in
fact deal with excessive debt levels via other “traditional” methods,
“that is, achieving an adequate level of primary surplus.”

Countries also understand that reducing the debt burden over time
can be achieved only through sustainable economic growth, which requires
structural reforms “aimed at improving the functioning of the labour,
capital and goods market.”

“That is why, even if belatedly and reluctantly, governments and
parliaments in Greece, Ireland and several other European countries have
adopted tough recovery programmes and radical reforms,” Bini Smaghi
said. “And that is why the other European countries are supporting them.
They know that the alternative is much worse for their citizens.”

— Frankfurt bureau: +49-69-720-142; email: frankfurt@marketnews.com —

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