Bloomberg News

Weber Says Investors Should Take Losses in Swap of Greek Debt

October 13, 2011

Oct. 13 (Bloomberg) -- Axel Weber, the former president of Germany’s central bank, urged a restructuring of Greek sovereign debt that results in losses for investors and banks, which would then require additional capital.

Weber, speaking today in Philadelphia, proposed a swap in which bondholders would exchange claims on low-rated Greek debt for a wider claim on the euro area. Banks would forgo some principal for better debt, Weber said. Such a program shouldn’t be referred to as a “default,” he said.

European leaders this week pushed back a debt-crisis summit amid opposition to Germany’s drive for deeper-than-planned Greek bond writedowns that Luxembourg’s Jean-Claude Juncker said may exceed 60 percent. The Oct. 18 meeting was postponed to Oct. 23 as Europe gropes toward a master plan for dealing with Greece’s oversized debt, insulating the Spanish and Italian markets, and shielding banks from the fallout.

“We have to get to a system where with a restructuring of Greek debt, losses are borne by those that made the decisions to buy the debt, and these are investors and bondholders,” Weber said in a speech at the Federal Reserve Bank of Philadelphia.

As a result of losses from the Greek debt swap, some banks will need to be recapitalized, especially weaker ones, Weber said. Stronger companies can probably make it through without being recapitalized, he said.

Bank Capital

“Only more bank capital can assure further loss absorption and re-establish confidence in the solidity and solvency of banks as counterparties,” Weber said in a slide presentation accompanying his talk.

Resolving the European debt crisis should be part of global efforts toward “rebalancing” the world economy, said Weber, 54, who in February unexpectedly announced he would resign from the Bundesbank and as a European Central Bank policy maker.

China, singled out among countries with current-account surpluses, needs to do its part to make its currency more flexible and improve its “social security” systems of health care, pensions and unemployment insurance, Weber said.

In addition, nations with large current-account deficits “should consolidate their public finances as quickly as possible,” Weber said in one slide.

A decline in investor confidence in some European nations’ ability to pay their debt has rattled world financial markets throughout 2010 and 2011. The ECB said Oct. 6 it will reintroduce yearlong loans, giving banks access to unlimited cash through January 2013, and resume purchases of covered bonds to encourage lending. The central bank left its benchmark interest rate at 1.5 percent.

Slovakia Fund

Today, Slovakia approved Europe’s enhanced bailout fund, completing ratification across the 17 euro countries. Lawmakers voted to support the European Financial Stability Facility in the second attempt this week after parliament failed to approve the measures on Oct. 11.

Enhancing the powers of the EFSF, the temporary bailout fund, is crucial for adopting the key element in the strategy to prevent contagion from the debt crisis that has spread from Greece to other countries in the region. European Commission President Jose Barroso yesterday called for a reinforcement of crisis-hit banks, the payout of a sixth loan to Greece and a faster start for a permanent rescue fund to ease debt woes.

Weber dismissed options involving expanding the EFSF and said Germany can’t shoulder the burden of bailing out country after country in Europe beyond Greece, Ireland and Portugal. He also said that the ECB shouldn’t be a backstop for European governments and should stick to its role as lender of last resort for banks.

Fiscal Union

Over time, European governments should move toward a closer fiscal union, Weber said today.

Yesterday, Weber said heavily indebted countries outside Europe that run deficits are in danger of facing surging borrowing costs. “No high-debt deficit country should feel safe,” Weber said at Princeton University in New Jersey. Countries with high debt levels and annual budget shortfalls including the U.S. should not have a “wrong sense of security” about being able to roll over bonds as they come due, he said.

Weber said in February that a lack of “acceptance” among euro-area leaders for his views on monetary policy caused him to give up on becoming the next chief of the ECB. Mario Draghi, head of Italy’s central bank, will succeed Jean-Claude Trichet as ECB president on Nov. 1.

Weber will become chairman of UBS AG, Switzerland’s largest bank, in 2013. He is currently a visiting professor of economics at the University of Chicago Booth School of Business.

--Editors: Kevin Costelloe, Leon Mangasarian

To contact the reporter on this story: Scott Lanman in Philadelphia at slanman@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net


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