European Central Bank Governing Council member Jens Weidmann said Greece may need a second debt writeoff after enacting economic reforms, deepening a dispute over how to return the country to financial health.
“One should ask if it would create trust if Greece were to receive a debt writedown today,” Weidmann said at an event in Berlin today. “Would it not make more sense to give the prospect of a writedown that one would need to regain market access when the reforms are actually carried out?”
Weidmann, who heads Germany’s Bundesbank, said Greece’s debt sustainability and financing gap need to be “honestly” discussed by European leaders. The finance ministers of the 17 euro nations meet on Nov. 20 to discuss how to pay for a two- year extension of Greek budget targets. Germany has said imposing losses on European taxpayers who have lent to Greece is “out of the question.”
“A debt writedown itself wouldn’t solve the problems,” Weidmann said. Enacting a writedown today when the budget still isn’t sustainable “is surely not sensible.”
Greece’s creditors led by Germany opted on Nov. 12 to keep bailout funds flowing instead of risking a default that could lead to the nation’s exit from the euro and stir more turmoil for the countries that remain in the single-currency bloc.
“The first question is what to do about the financing gap that has been opened, the second is the not-to-be-assumed sustainability of state debt,” Weidmann said. “Those are facts that can’t be negated, they have to be honestly addressed. The question of -- if because of that -- the necessity for a debt writedown arises, I see that as remaining open.”
Making Greece’s debt “sustainable,” previously defined as cutting it to 120 percent of gross domestic product by 2020, is critical for keeping the International Monetary Fund involved. The “troika” of international donors including the IMF, the ECB and the European Union have said Greece’s debt will peak at 190.1 percent of GDP in 2014.
In March, Greece pushed through the biggest sovereign restructuring in history after getting private investors to forgive more than 100 billion euros ($132 billion) of debt.
IMF Managing Director Christine Lagarde suggested on Sept. 24 that Greece may need another debt cut, saying that the country’s financing gap won’t be bridged with austerity alone. This week, Greece reported its 17th straight quarter of economic contraction with economists forecasting GDP declines in 2013 and 2014.
“It seems we are gradually moving toward a Paris Club- style solution to Greece’s issue: some debt forgiveness, in exchange for a reform plan,” Thomas Costerg, an economist at Standard Chartered in London, said in an e-mail. “It’s not taboo anymore, which is already a great step forward.”
The Bundesbank president, who has clashed with ECB President Mario Draghi over crisis-fighting measures, said governments weren’t focusing closely enough on how to set the right incentives for countries receiving joint financial aid to carry out budget reforms.
“How can the Portuguese prime minister, the Irish prime minister go to their parliaments with more reform measures, when there’s a precedent for a country to keep receiving financing without having kept to the agreed reforms,” Weidmann said.
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