FRANKFURT (MNI) – Reforms to Eurozone economic governance should
allow states to restructure their debt in an orderly manner, but only in
“extreme” circumstances, European Central Bank Governing Council member
Axel Weber argued Monday.

Confidence in the public finances in some Eurozone countries
remains extremely thin, the outgoing head of the Bundesbank said in
remarks for delivery to the German parliament’s budget committee and
posted on his bank’s website.

Market mistrust is obliging some highly indebted governments to
borrow at high interest rates or to seek external aid, he noted.

Weber called for a “significant strengthening” of the EU’s
stability and Growth Pact and rejected the idea that the European
Financial Stability Facility should be allowed to buy sovereign bonds
on secondary markets.

In case a Eurozone state faces the threat of default, “a crisis
management mechanism should be established that does not erode the
responsibility of member states and actors on financial markets,” Weber
explained.

In “extreme cases” of excessive debt, an “orderly restructuring
procedure” could help, he added.

“Creating the conditions for restructuring … at this point,
regardless of whether the decision is made to make these softer or
harder, will help overcome debt,” he added later in response to
questions from the budget committee.

Weber again rejected the idea of the EFSF buying bonds of troubled
countries on the secondary market, as this would shift responsibility
away from private creditors and national fiscal policies and instead
“burden the taxpayers of financing countries with additional, possibly
substantial risks.”

However, he did endorse the idea agreed late Friday by Eurozone
leaders of allowing the bailout facility to purchase sovereign bonds
directly in the primary market, if the countries concerned have already
signed up for an aid package and subscribed to the attached conditions.
In that case, buying their bonds directly would be a reasonable
alternative to making loans, he said.

“In other words, if the same criteria are used for bonds to help
countries like Greece as would be used for loans, then it is an option,”
the Bundesbank chief said.

In discussions about the future European Stability Mechanism, some
are calling for shared-liability bonds, so-called Eurobonds, or
proposing lowering the interest rate on aid programs.

Such ideas “reduce the incentives for solid fiscal policy and
damage important fundamental principles of monetary union, such as
responsibility for fiscal policy and the exclusion of reciprocal
liability,” he argued.

–Frankfurt bureau, +49-69-720142, frankfurt@marketnews.com

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