ECB policymaker wants banks off Greece bailout hook

Sat Jan 7, 2012 6:28pm EST
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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.   Continued...