FRANKFURT (MNI) – A sovereign default should never be ruled out “in
principle,” ex-Bundesbank President Axel Weber told the Wall Street
Journal, warning that avoiding default at all costs would be more costly
in the long run.

In an interview published over the weekend, the former central
banker added that he saw “only very limited options” for resolving the
Greek debt crisis: default, partial haircuts or a guarantee for the
outstanding Greek debt balance.

His comments, perhaps unsurprisingly, put him at odds with his
former colleagues at the ECB, who have argued strenuously that a Greek
default or debt restructuring must not be admitted under any
circumstances.

“You should never in principle rule out a default. To rule out
failure, under any circumstance, would set the wrong incentives,” Weber
said. “Success and failure are part of the market mechanism. There are
potentially huge costs involved in a default, but ruling out default
could be even more costly in the long run.”

Weber also said that simply declaring there would be no bailouts
was “not credible any longer,” and that the idea of Greece returning to
the financial markets as soon as 2013 “has long been untenable.”

“A more realistic assumption for Greece to return to the market is
between three and seven years,” the former German central bank chief
said.

Weber the recent stress in financial markets was a “clear and
unmistaken call for a full-fledged solution rather than a continuation
of the piecemeal approach.”

“Ultimately, solving the Greek debt problem will have to deal with
the outstanding, past amount of debt and there are, unfortunately, only
very limited options: Either a default or partial haircuts or a
guarantee for the outstanding amount of Greek debt,” Weber said.

“Governments have to decide which option they want to go for, but
the current piecemeal approach of repeated aid programs inevitably leads
to the latter solution,” he added. “At some point you’ve got to cut your
losses and restart the system.”

Commenting on private sector involvement in a new Greece bailout
package, Weber said the only way it could be done in an “orderly”
fashion was to focus on new debt issuance and make involvement “part of
a contingent bond contract.”

“We’ll need to come to a system where sovereign debt is being
priced again on the standalone ability of governments to repay their
debt, and to facilitate this it has to be part of the bond contract
terms,” he said.

Weber warned that the Eurozone debt crisis could develop into a
“profound financial stability risk,” and that in some areas things have
yet to improve.

“My impression is that some of the issues are substantially worse
than they were perceived to be a year ago,” the former central banker
said.

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

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