Bloomberg News

Bundesbank President Says Euro Could Withstand Greek Default

June 12, 2011

June 12 (Bloomberg) -- Bundesbank President Jens Weidmann raised the pressure on governments to agree to a Greek bailout without the European Central Bank taking part in easing the country’s debt burden, saying the euro can withstand a default.

Weidmann said the ECB was unwilling to turn its emergency bond-buying program into a “lasting institution” and that Greece’s implementation of austerity measures and asset sales was crucial to securing the handout to prevent a default. He spoke in an interview with German newspaper Welt am Sonntag.

“If the commitments are not met, that cancels the basis for further funds from the aid package,” Weidmann told the newspaper. “This would be Greece’s decision, and the country then would have to bear the surely dramatic economic consequences of a default. I don’t think this would be sensible, and it would surely put partner countries in a difficult situation. But the euro would even in this case remain stable.”

Weidmann’s depiction of a default as a liveable outcome contrasts with warnings from fellow ECB officials Lorenzo Bini Smaghi and Christian Noyer, as well as European Union Economic and Monetary Affairs Commissioner Olli Rehn, who described it as a “Lehman Brothers catastrophe” last week.

European officials are racing to find a plan to stem Greece’s debt crisis by June 24 while sharing the cost of a new rescue with bondholders. German Finance Minister Wolfgang Schaeuble is calling for Greek bondholders to extend the maturities of their debt by seven years, a move ECB officials say is akin to a default.

‘End of the Line’

A bailout for Greece must include “voluntary” investor participation and meet the approval of central bankers, Luxembourg’s Jean-Claude Juncker said yesterday in an effort to narrow the dispute.

“We cannot push through private investor participation without, or against, the ECB,” Juncker said on Radio Berlin- Brandenburg. “A default would mean the ECB would have to end its accompanying programs. A default would mean we have reached the end of the line.”

Schaeuble, in a June 6 letter to ECB President Jean-Claude Trichet and fellow euro finance ministers, called for the seven- year extension to give Greece more time to cut its debt and budget deficit.

Forcing losses on creditors may also hurt confidence, Commerzbank AG Chief Executive Officer Martin Blessing said in an interview published today in Welt am Sonntag. Investors had been told they wouldn’t need to join any efforts before 2013, and reneging on that pledge would “not exactly help build trust in the markets,” Blessing said, according to the newspaper.

Governments aim to reach an agreement on a new aid package by a European Union summit on June 23-24. The International Monetary Fund has threatened to withhold its share of what remains of Greece’s original 110 billion-euro ($158 billion) bailout until governments guarantee that the country’s financing needs for the next 12 months are covered.

“We cannot accept an uncontrolled bankruptcy of a country,” German Chancellor Angela Merkel said yesterday in her weekly video message. Such an event may endanger the recovery of Germany’s economy, she said.

European governments and the IMF would lend as much as an extra 45 billion euros to Greece under a new bailout plan that also includes roughly 30 billion euros in asset-sale proceeds and about 30 billion euros in rollovers by creditors, two people with direct knowledge of the talks said last week.

--Editors: Marthe Fourcade, Philip Sanders.

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editor responsible for this story: Dick Schumacher at dschumacher@bloomberg.net.


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