European Central Bank executive board member Lorenzo Bini Smaghi said in an interview Thursday that a Greek debt restructuring would cripple much of the country΄s banking system and bring the economy to its knees.
Amid rising concern about Greece΄s ability to pay back its mountainous debt, Bini Smaghi told Italy΄s Il Sole 24 Ore that investors need confidence for Greece to return to the market and that continued talk about debt restructuring will keep investors away from the troubled Hellenic Republic.
Nevertheless, both Greece and Portugal have no alternative to major structural reforms, the central banker said.
"According to our analysis, a debt restructuring would result in the failure of a large part of Greece΄s banking system," Bini Smaghi told the paper. A restructuring would mean that Greek banks would lose access to ECB refinancing, hurting lending to households and businesses as well as individuals and pension funds, Bini Smaghi outlined.
In the event of a restructuring, "the Greek economy would be on its knees, with devastating effects on social cohesion and the maintenance of democracy in that country," he warned. While Greece must ultimately decide the way forward, "other countries must avoid pushing it towards a catastrophe," he urged.
Greece must continue to implement the program agreed to with the International Monetary Fund and the European Union to bring down its debt, the central banker emphasized. "There are no alternatives."
The same holds true for Portugal, Bini Smaghi stressed, saying that the country, which just last week said it would need a bailout from its European partners, has "no alternatives to adjustment and reform." Portugal΄s problem is "low growth," Bini Smaghi said, adding that the country needs to be united on adjusting public finances and adopting "bold reforms" to restore competitiveness.
Queried about claims that the ECB pressured Portuguese banks to reduce their exposure to the ECB. Bini Smaghi strongly retorted, "It΄s wrong." In fact, "it΄s the ECB that has financed and continues to finance the Portuguese financial system, and those of Ireland and Greece."
Asked if the ECB would soon be accepting Portuguese bonds regardless of the country΄s sovereign rating, a step the ECB has taken to aid both Greece and Ireland, Bini Smaghi was very clear: "If Portugal accepts an adjustment programme with the IMF and the European Union, it will be treated in the same way."
Bini Smaghi was quick to say that Spain isn΄t at all in the same position as Portugal, noting that unlike Portugal, Spain commenced reforms in its financial system, pensions and labor market "some time ago."
Turning to the ECB΄s monetary policy, Bini Smaghi said the central bank is pondering how to return to bidding mechanisms "without creating problems for the banking system as a whole." During the crisis, the ECB has provided unlimited liquidity at its refinancing operations, which has resulted in some banks, especially from the troubled peripheral countries, now being reliant on the central bank for their liquidity needs.
Low interest rates were justified by recession and deflation in 2009, but "as we move away from those risks, the less justified these interest-rate levels are." The ECB raised its key interest rates by 25 basis points last Thursday; it was the bank΄s first rate move since May 2009 and its first rate hike since July 2008.
Further rate moves would depend on the economy and inflation, he said. Recent data and IMF forecasts "seem to confirm the scenario of sustained global growth, which is also transmitted to the euro."
Asked if a stronger euro worried him, Bini Smaghi said that when considering the 40 main currencies, the euro΄s nominal exchange rate is roughly the same as in 2005 and actually 10% lower in real terms.
Bini Smaghi also rebuffed criticism that the bank΄s monetary policy stance is inappropriate for weak states. "If we were to decide the Union΄s monetary policy on the basis of what happens in two or three countries which represent less than 10% of GDP, and ignore the rest, we would be making a big mistake," he said.
Monetary policy can΄t resolve what happens in countries in crisis, he said, but rather, such problems can be aided "with fiscal and structural measures."
By Todd Buell
source: Dow Jones Newswires
