LONDON (MNI) – European Central Bank Executive Board Member Lorenzo
Bini Smaghi issued a stern warning on the dangers of sovereign debt
default or restructuring.

Speaking at the London Business School, Bini Smaghi warned such a
course of action could mean strong contagion effects for other euro area
countries as well as a sharp economic contraction.

The official said that the the next Irish government would stick
with ‘Plan A’ despite the noises coming from the Fine Gael opposition
party ahead of elections there later this month that it wants an
easement of the terms of the IMF/EU adjustment programme.

“The main challenge…is to convince the markets that member
states are going to bring public finances back under control,” he
said.

Bini Smaghi also insisted that the ECB would not allow states to
inflate their debt burdens away:

“In the euro area inflation is forbidden, the ECB is committed to
price stability and has ensured price stability, and I think the markets
trust it,”,” he said.

“Compared to others, the euro area is quite credible (on
inflation),” Bini Smaghi added.

“Plan B, is much worse than Plan A” – he continued, stressing the
need for Greece and Ireland to stick with their EU/IMF programmes.

Programmes could be adjusted once the country has shown
convincingly it is on track, he said:

“There are standard ways to change the programme, one is to
lengthen the maturity or to try to make the EFSF more effective by
modulating the interest rate or maturities depending on the success of
the programme. So if a country is on track you can lengthen the maturity
or reduce the premium, so you can make the programme sustainable, even
if markets don’t believe it,”

–London newsroom: 0044-207-862 7492: email: ukeditorial@marketnews.com

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