ECB policymaker wants banks off Greece bailout hook

Reuters News
Posted: Jan 07, 2012 10:34 AM
ECB policymaker wants banks off Greece bailout hook

By Paul Carrel

FRANKFURT (Reuters) - European Central Bank policymaker Athanasios Orphanides called for euro zone leaders to abandon plans to make private sector investors help reduce Greece's debts, but his push showed no sign of gaining any traction in Europe's capitals on Friday.

Orphanides, who is also the central bank governor of Cyprus, said in a newspaper column that dropping plans to force losses on private sector holders of Greek debt would "help restore trust" in the euro zone and lower the borrowing costs of other governments in the currency union.

The involvement of the private sector in the Greek bailout has eroded investor confidence in euro zone sovereign debt and raised pressure on borrowing costs, despite policymakers' efforts to reassure markets that Greece is an isolated case.

"Reversing the Greek private sector involvement decision would also raise the financing costs on the Greek government, but by restoring trust in the euro zone it would reduce the financing costs of other euro zone governments," Orphanides wrote in the Financial Times.

A 30-year loan to Greece on a low interest rate from other countries could accompany the reversal of private sector involvement, he said, helping to keep its financing costs in line with present fiscal plans.

While the idea of ensuring that investors understood they should price in risks associated with sovereign debt may have made sense, it has not functioned in practice, Orphanides said at an economics conference in Chicago.

"It is a thoroughly inefficient way of dealing with the moral hazard issue that we are still paying for now," he said.

One euro zone government official said that behind the scenes there was no talk of dropping PSI for Greece.

An ECB spokesman declined to comment on whether Orphanides' views represented the position of the ECB as a whole.

However, the ECB warned government leaders when they set out on a path of private sector involvement (PSI) in 2010 that the policy posed a risk for investors' trust in sovereign debt.

A euro zone central bank official noted that Orphanides had published his comments ahead of fresh talks this month on Greek PSI and that Cypriot banks are heavily exposed to Greek debt.


Banks and investment funds have been negotiating with Athens for weeks on a PSI scheme under which they will accept a nominal 50 percent write-down on their Greek bond holdings in return for a mix of cash and new bonds.

"In the markets people are worried that they will come up with 70, 80 or 100 percent haircuts next," said Berenberg bank economist Christian Schulz, adding that Orphanides' comments would help limit Greek PSI to a 50 percent write-down.

But Schulz, a former ECB economist, doubted PSI in Greece would be dropped altogether.

"That would be great - that would certainly be a positive surprise," he said. "But I'm not expecting that to happen. I would see maybe a 20 percent chance of that. I think it would be extremely difficult to get through the German parliament."

Orphanides said that dumping private sector involvement in reducing Greece's massive debts may be the only way to convince markets that it was safe to invest in the euro zone again.

A deal struck at a Franco-German summit in Deauville, France in October 2010, which would have ensured the private sector was involved more generally in future euro zone bailouts, was reversed in December. However, euro zone leaders have agreed that the Greek deal will be unique and not be repeated.

Orphanides said this was not enough and that private sector losses in Greece added to uncertainty and contagion risks.

"The Greek private sector involvement reinforced the idea that holders of euro zone sovereigns should be prepared to incur losses even under circumstances that would not necessarily trigger comparable losses for sovereigns outside the euro zone."

John Ventre, senior portfolio manager at Skandia Investments, said dropping PSI for Greece was probably not the way to solve the crisis and that the answer lay with the ECB.

"My view is that in some respects it's a bit too late to abandon the PSI - the damage to confidence has probably already been done. Would it help markets in the short term? Yes.

"However in the medium term the only resolution to this problem is a willingness to let the ECB perform one of the key functions of a central bank - to be the buyer of last resort for sovereign bonds," Ventre said.


The ECB has resisted political pressure to ramp up its bond-purchase program to ease borrowing costs for crisis-hit euro zone states - resistance that new Executive Board member Joerg Asmussen kept up in an interview with German radio station


Asmussen said the ECB's bond purchases are "limited in timeframe and volume. One has to say that very clearly, too."

Despite resisting the pressure to boost its bond buying, the ECB has used an ultra-long liquidity operation to pump almost half a trillion euros into the banking system.

Another ECB policymaker, France's Christian Noyer, said European sovereign debt sales have been going much better since the ECB started to extend the long-term loans to banks last month.

Equipped with cheap funds in large quantities from the ECB, Noyer said he expected banks to step up lending to companies and consumers and that they also could buy government bonds.

"There is no reason why they should be timid about (buying bonds)," he told Europe 1 radio. "Since the refinancing operations have gone well at the end of last year and the beginning of the year, I think that it is starting to work."

Commercial banks' overnight deposits at the ECB nonetheless hit a record high of 455 billion euros, data showed on Friday, indicating banks prefer the safety of the central bank to higher rates they could get from each other.

The euro hit 16-month lows against the dollar on Friday and was near an 11-year low versus the yen.

(Additional reporting by Sinead Cruise in London, Nicholas Vinocur and Leigh Thomas in Paris, and Mark Felsenthal in Chicago; Editing by Jeremy Gaunt and James Dalgleish)