Mario Draghi, the likely next head of the European Central Bank, on Tuesday endorsed the bank's hard line against letting Greece default on its borrowings as a solution to its crushing debt crisis.
Greece, which was already granted a 110 billion euro bailout last May, needs tens of billions of euros in additional financing over the coming years as it remains locked out of international debt markets.
The question is whether to get private sector investors to share the burden, and if so, how to do that without disrupting Europe's financial system.
Draghi said at a European Parliament hearing on his nomination that he opposes any move by Greece to not fully repay investors what they are owed, which would be considered a default by ratings agencies.
Draghi said "the cost of a default would likely exceed its benefits."
European finance ministers are trying to work out some kind of solution at a meeting on Tuesday evening in Brussels, ahead of a European Union summit later this month, with Germany and some other states proposing that private investors accept delayed repayment on Greek bonds.
But the ECB has repeatedly rejected any such suggestion. And Draghi, who will replace current ECB head Jean-Claude Trichet when his term expires on October 31, repeated Trichet's position word for word, ruling out anything that is not completely voluntary.
Any money saved by Athens not paying the full amount on government bonds would simply be spent bailing out Greek banks who would suffer losses on those bonds, Draghi said at a hearing of the European Parliament's economic and monetary affairs committee.
"As a haircut is implemented they are going to have a capital loss, and often, probably, their capital would be completely wiped out," Draghi said. "So more money would be needed."
He also pointed out that Greece is still running a budget deficit and has to get credit from somewhere, so that anyone advocating restructuring would have to be prepared to come up with more aid.
"All in all, the costs seem to outweigh the benefits," he said.
Draghi did not rule out a so-called Vienna Initiative approach, under which investors would be asked to voluntarily renew their holdings as they expire. "If there is a voluntary exchange and there is no credit event, it seems pretty safe," he said.
Ratings agencies say any change to Greece's debt that materially hurts investors would be classified as a default.
But a number of economists say a mere rollover of investors' holdings in Greek debt will not be enough to solve the country's problems because the debts are simply too big to be paid. Eventually, they say, the debt load must be reduced.
European finance officials are struggling to find a way to keep Greece from defaulting on its debts. The 110bn euro rescue loans granted by other eurozone countries and the International Monetary Fund has failed to solve the country's problems. A deep recession has left it unable to balance its budget despite cutting spending and raising taxes and it remains unable to borrow by selling bonds.
Germany has said any new financing should include a contribution by bondholders, proposing they accept new bonds that mature seven years later to help give Greece more time to fix its problems. That has left the eurozone's largest country - and main funder of its bailouts - at odds with the central bank.
Dutch finance minister Jan Kees de Jager said his government would aim to have private investors contribute more than 30 percent of any new aid package. He did not specify how that would occur.
Draghi said that the financial crisis, and the shaky condition of some of Europe's banks, should not hinder the ECB from carrying out its main mission of fighting inflation. That can mean raising interest rates, which the bank started doing in April, lifting its main rate from its crisis low of one percent to 1.25 percent. The bank has signalled another increase for July, even though that could make things harder for Greece as well as Portugal and Ireland, which have also needed bailouts.
"No financial crisis and no persistent bidder bank could ever make the ECB detour from price stability as an objective," he said.
AP
