ECB rejects restructuring as Greece struggles to repay

European Central Bank (ECB) officials warned of catastrophic consequences if Greece is allowed to restructure its sovereign debt.

“Default or debt restructuring is a dramatic economic and social event for the country which experiences it — I would call it political ‘suicide’ — which leads many into poverty,” Executive Board member Lorenzo Bini Smaghi said in Florence on Tuesday. Fellow board member Juergen Stark said restructuring “wouldn’t be a solution to the problems that Greece needs to overcome.”

Concern at the Frankfurt-based ECB is growing after Greek bond yields soared to all-time highs on speculation the government will be unable to meet its refinancing needs under the conditions of its current euro 110-billion ($158 billion) bailout package. Greece’s credit rating was yesterday cut two levels by Standard & Poor’s, which said further reductions are possible as the risk of default rises.

“The ECB is fighting to keep politicians away from the restructuring debate,” said Nick Kounis, head of macro research at ABN Amro in Amsterdam. “They are worried that people are starting to consider it in important capitals.”

The strategy may be working. Germany, which last month indicated a restructuring was possible, yesterday said extending further aid to Greece may be preferable.

European finance chiefs, who held an unscheduled meeting in Luxembourg on May 6 to discuss Greece’s plight, said the nation needs “a further adjustment programme.” Athens-based newspaper Kathimerini reported on Tuesday that the International Monetary Fund is arranging a new aid package to replace Greece’s existing bailout. The plan would allow Greece to avoid selling bonds for another two years, the newspaper said. Under the original rescue programme, Greece was due to return to markets and sell about euro 27 billion of bonds next year and a similar amount in 2013.

Record financing costs are dimming expectations that Greece will be able to sell debt at manageable rates. The country’s two-year bonds yield about 25 per cent and the 10-year yield is at 15.4 per cent, more than twice the level when Greece received its aid package a year ago.