The European Central Bank kept up its attacks on the idea of letting Greece restructure its crushing debt load, even as a top ratings agency argued that Germany's banks would probably survive losses from such a move with credit ratings intact.
Juergen Stark, the European Central Bank's chief economist, said at a conference in Berlin on Wednesday that cutting Greece's debt by letting it pay later or less than the full amount owed to banks and other bondholders was not the simple solution some think it is.
"To think that there is an easy way out, in that a country's debts are largely or fully relieved, is an illusion," Stark said. "Debt relief cannot and must not be the solution."
Stark said Greek banks holding government bonds would suffer such losses during a restructuring that they would need new capital from government, a step which "would not be very cheap."
"We should think one connection further when we use this miracle word debt relief, or debt restructuring," he told a conference organized by a group linked to Chancellor Angela Merkel's party.
Top ECB officials are taking turns on a daily basis in talking down the thought of a restructuring. Their argument is that it would frighten investors away from lending to other countries and hurt the banks.
The bulk of economists, however, have been saying for months that Greece probably cannot pay all its debts despite last year's euro110 billion ($155 billion) bailout from the European Union and the International Monetary Funds. Efforts to cut spending and reduce its deficit have worsened a severe recession, making the debts bigger, not smaller.
That leaves European officials with an unpleasant choice: a default and restructuring that could tarnish the entire eurozone and raise borrowing costs for other members, or keeping Greece on a years-long financial lifeline through more bailouts funded by taxpayers. A second bailout is already under consideration.
Many observers think the EU's strategy is to muddle through, hoping a growing global economy will eventually get Greece back on its feet. Several officials have hinted at allowing a stretch-out of repayments to buy more time, but economist say that would not reduce the debt burden much and the ECB opposes that step as well.
The Frankfurt-based central bank, the chief monetary authority for the 17 countries that use the euro, holds billions in Greek bonds itself and would suffer losses on its own balance sheet in case of a harsh restructuring.
Fitch Ratings said in a report that it did not see any German banks suffering a ratings downgrade due to their exposure to Greece. Concern about what would happen to German and French banks holding bonds from struggling Greece, Portugal and Ireland in case of a restructuring has been a key motivation for bailouts given to those countries.
Aside from an isolated Greek default, however, Fitch said that there was "a far greater threat from the potential contagion risks involving other weak sovereigns in Europe and their banking systems, and their impact on German banks." The banks could still be hurt by a restructuring that goes beyond Greece.
In Greece alone, even a severe reduction, or haircut, in bond value of 50 percent would not cost German banks their credit ratings, Fitch said. In a restructuring, bondholders are given new bonds either with reduced interest payments or, in the worst case, less principal. The consequences can include being cut off from credit for years.
Fitch "does not envisage any rating action on German banks purely as a direct result of their exposure to Greek risk," Fitch analysts wrote in their report. "Most German banks also have limited direct exposure to Portuguese and Irish sovereign risk."
The most exposed German bank is Commerzbank, with around euro2.9 billion in exposure to government debt, most through its Eurohypo subsidiary. Still, the bank "should be able to absorb such a loss through its recurrent earnings." Fitch made similar assessments of other banks with Greek exposure: Deutsche Postbank, Landesbank Baden-Wuerttemberg, Landesbank Berlin, and DZ Bank.
Perhaps of less comfort to officials in Germany was its assessment that losses from a restructuring would instead weigh on German taxpayers, through the government's KfW bank, which provided Germany's share of the bailout funds, and taxpayer-backed vehicles set up to absorb banks' bad investments left over from the financial crisis.
AP
