European Central Bank officials today ruled out a Greek debt restructuring, clashing with political leaders over a solution to the sovereign debt crisis.
"A Greek debt restructuring is not the appropriate way forward - it would create a catastrophe," ECB Executive Board member Juergen Stark said today in Lagonissi, Greece.
Mr Stark said any restructuring would undermine the collateral Greek banks use to gain loans from the ECB and "this holds true for all kinds of restructuring".
"It's an illusion to think that a debt restructuring or haircut or rescheduling would help resolve Greece's problems," he said. "A restructuring would wipe out part or all the capital of the Greek banks."
Fellow board member Lorenzo Bini Smaghi said in Milan there is no difference between a "hard" or "soft" restructuring. "A solution for reducing debt but not paying for it will not work," he said.
Their comments came as the IMF warned today that Greece's drive to shore up its troubled finances would fail unless it sharply accelerated reforms, and the ECB hit back at suggestions a debt restructuring might be the solution.
European finance ministers for the first time this week floated the idea of extending Greece's debt-repayment schedule as the nation struggles to meet the terms of last year's €110 billion bailout. EU officials say that Greece will not be able to return to markets and sell €27 billion euros of bonds next year as scheduled under the bailout, leaving them searching for alternatives to avoid a default.
Earlier today, Minister of State for Europe Lucinda Creighton said it was“reckless” to place Ireland and Greece in the same category. “We’re not in the situation that Greece is in. Our economy is a very strong economy, notwithstanding the problems we have with consumer spending,” the Minister said.
Progress by Greece on its programme “has been pretty slow and disappointing, unlike the case of Ireland,” she added on RTÉ this morning.
European finance ministers have said they could ask private creditors to agree to a voluntary extension of the maturities on their Greek debt but have also made clear that the priority is to ensure an acceleration of Greek reforms.
"The programme will not remain on track without a determined reinvigoration of structural reforms in the coming months," Poul Thomsen, an IMF envoy who is monitoring Greek economic progress, told a conference in Athens today.
"Unless we see this invigoration, I think the programme will run off track," he said, in one of the strongest warnings to Greece since it sealed the rescue one year ago.
Prime Minister George Papandreou's government has struggled to rein in rampant tax dodging and is under acute pressure to begin selling off state assets to help Greece meet fiscal targets tied to last year's 110 billion euro EU-IMF bailout.
Under its rescue terms, Athens is charged with reducing its budget deficit to 7.6 percent of GDP this year. Mr Thomsen said that without further measures Athens would not be able to get it much below 10 per cent.
The euro struggled to hold onto gains against the dollar and the cost of insuring Greek debt against default rose today amid ongoing talk of a restructuring.
Euro zone ministers have not spelled out how what they refer to as a "reprofiling" of Greek debt would work.
The yield on Greece's 10-year bond rose five basis point today to 15.7 per cent, more than twice the rate at the time of the bailout a year ago.
The country's two-year bond yields almost 25 per cent. Getting bondholders to voluntarily accept delayed payments in a so-called reprofiling will not be considered until Greece makes additional budget cuts and begins an asset-sale programme worth €50 billion, EU Economic and Monetary Commissioner Olli Rehn said in Brussels today.
"Privatisation makes a real difference," said Mr Thomsen. "If targets can be met, it will make a change to debt sustainability."
The ECB is also concerned that allowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Portugal and Ireland, which followed Greece in accepting bailouts.
The ECB has bought €76 billion of bonds of fiscally stressed countries in the past year and may suffer along with private investors in any restructuring.
Bloomberg