It may be necessary to write off some of Greece's debt, but that it is not an overall solution to the country's economic problems, the head of Germany's central bank has said.
Bundesbank President Jens Weidmann told Bild newspaper Thursday that the need for a Greek "haircut" _ in which the country's government pays back less than what it owes to bondholers _ could not be ruled out.
"But that will not solve the cause of the problems. Greece must get a grip on its state sector and make its economy competitive _ a debt forgiveness must not become an attractive way out of self-inflicted problems."
Weidmann was also critical of the European Central Bank's recent purchases of bonds from troubled countries, saying "we're at best buying time, taking risks, but not solving the real problem."
When asked how much time could be bought, Weidmann said "not too much."
European officials are trying to keep Greece's financial troubles from triggering a wider banking collapse. Eurozone officials plan to push banks to add to their financial cushions in case Greece cannot repay its debts, which would mean losses on bank holdings of the country's government bonds.
Charles Dallara, managing director of the Institute of International Finance, is in talks over a July 21 agreement in which banks would take 21 percent losses on much of the Greek debt they hold, said spokesman Frank Vogl. The IIF represents the banks in the negotiations.
Those losses are widely considered to be too small to reduce Greece's debt to where it can be repaid, and eurozone officials have indicated the deal may be re-opened and a larger reduction, or haircut, imposed.
The head of Germany's largest commercial bank warned that forcing losses on bondholders such as banks and making banks devote more money to their capital cushions could backfire by making them restrict credit to the rest of the economy.
Josef Ackermann, CEO of Deutsche Bank, said officials must ask whether banks "will not be practically forced to (credit) restrictions through possible debt reduction in the eurozone and the new regulatory conditions."
"The bank's capital levels are not the problem, but the fact that government bonds have lost their status as risk-free assets," he told a conference in Berlin.