ECB may have leeway for Greek debt restructuring

European Central Bank officials may have more scope to cope with a Greek restructuring than they are letting on even as policy makers warn that such a move could trigger the beginning of a “horror story.”

While German and French officials say the ECB would no longer accept Greek debt as collateral in its money-market operations should the country be forced to default, the ECB’s rules are less clear and only say that such a step “may be warranted” if officials deem it necessary. The ECB’s rhetoric may be as much about forcing Greece to step up budget cuts as it is about drawing a line in the sand, say Citigroup Inc. and Deutsche Bank AG economists.

“Without these ECB warnings, the Greeks wouldn’t have come up with the announcement of additional measures,” said Juergen Michels, chief euro-area economist at Citigroup in London. “The ECB showed early with the eligibility requirements on collateral rules that they can stretch the whole thing pretty far.”

European policy makers are seeking ways to restore investor confidence on increasing concern that Greece won’t be able to repay its debts after last year’s 110 billion euro ($155 billion) bailout. While finance ministers are mulling options such as extending maturities, ECB policy makers have argued that such steps could destroy Greece’s banking system and destabilise other nations in the 17-member euro region.

“Restructuring is not a solution, it’s a horror story,” ECB council member Christian Noyer said on May 24. His Spanish colleague Jose Manuel Gonzalez-Paramo said last month such a move would “very probably” have systemic consequences “quite likely more devastating than” the collapse of Lehman Brothers Holdings Inc. in September 2008.

While restructuring is “one option” to reduce the country’s debt load, “it is better to keep up pressure on Greece” to implement reforms, Dutch Finance Minister Jan Kees de Jager told Germany’s Financial Times Deutschland. Greece may need more time to meet its targets, German Finance Minister Wolfgang Schaeuble said in an interview with the Handelsblatt newspaper published today.

Nouriel Roubini, the economist who predicted the global financial crisis, said in Bucharest today that ECB council members’ remarks on the impact of a Greek default were “utter nonsense” and could “trigger a bank run in Greece.”

The ECB is for now sticking to its line that tougher austerity programs are the only way out of a quagmire that will see the country’s debt jump to almost 158 per cent of gross domestic product this year. Greece’s budget shortfall may average 9.5 per cent of GDP this year, the European Commission says.