Update: ECB Nowotny: Greece Bailout To Be Positive If Enacted

Author: Market News International | Category: News

–Adds Comments On Austerity, Monetary Financing, Greek Bond Profits

VIENNA (MNI) – The new E130 billion bailout deal for Greece struck
by Eurozone finance ministers early Tuesday will have a positive impact,
but Athens must first meet several conditions — and quickly — if the
rescue plan is to see the light of day, European Central Bank Governing
Council member Ewald Nowotny said Friday.

“I think the E130 billion package will have positive effects, but
it has to be noted that there are still a lot of conditions that have to
be fulfilled for it to become effective,” Nowotny, the governor of the
Austrian National Bank, said at a press conference here. “This has been
overlooked in the euphoria.”

He noted that Greece is required to implement “this week” many of
the actions it had promised in its first bailout package but not
completed.

He argued that in addition to budget cutting, Greece must be given
a chance for its economy to grow. “We have to think about active
[growth] measures because it is paralyzing only to think about cuts.
Cuts are a prerequisite but not an aim,” he said.

“The suggestion of a Marshall Plan for Greece, including
growth-supporting measures, is an important plan which should be
considered,” Nowotny added.

The Austrian central bank chief declared that, “Greece is in a very
serious and difficult situation and there are no certainties, but it has
to be given opportunities to come out of this situation.”

He cited Ireland as an example where such opportunities have been
created and taken advantage of. In Greece, there has been only sparse
foreign investment, even though it is a euro area country, Nowotny
noted. He added that structural reforms are needed, and that
organizational infrastructure must be created in order to attract
foreign investors to the country.

“For a foreign investor the risk is comparatively low, even if
Greece were to go back to using the drachma, Nowotny ventured. “Since
these would be export-oriented investments, his revenue would still be
in Euro and he would profit from an immediate devaluation of the
currency.”

With regard to the debate over austerity measures being adopted by
most Eurozone countries, Nowotny conceded that if they are too strict
they “will dampen economic development.” On the other hand, not
implementing austerity measures also has negative effects if it results
in an increase in the interest rate a country has to pay,” he added.

He estimated that an increase of 1% in interest rates for Austria
would dampen growth in 2012 from the currently projected 0.7% to only
0.3%. And for 2013, growth would be lowered from 1.6% to 1.1%. “This is
often overlooked in the public debate,” he said. “In fact, higher
interest rates would have an even greater negative impact on the
economic development than austerity measures.”

Nowotny reiterated the idea defended by all his ECB colleagues that
central banks cannot help finance governments. In the Eurozone, that is
the domain of the bailout funds, the EFSF and ESM, which must set up
“the famous firewall,” he said. “I hope that we will see a full
operability and activity of these stability mechanisms as soon as
possible.”

The Austrian central bank chief noted the recent agreement for
national central banks to transfer their profits on Greek bonds to their
governments, which would then pass them on to Greece to help reduce the
country’s debt load. He noted that EU finance ministers had agreed on
this transfer, “but the question is whether there will even be a profit
for the central banks which can be transferred.”

Speaking of the recent loss of the AAA rating on Austria’s
sovereign debt, Nowotny declared: “Regarding the real economy Austria is
normally better off than other countries, but regarding budgetary
factors it is worse off.”

He urged the government to implement planned deficit cutting
measures. The government blueprint “is definitely useful, but the devil
is in the implementation,” he said.

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