The European Central Bank’s vehement opposition to any restructuring of Greek debt, even a haircut, can now be revealed by Sunday’s Kathimerini via a letter sent on April 7, 2011 by then ECB President Jean-Claude Trichet to Greece’s prime minister at the time, George Papandreou.
The secret letter was sent just one day after then Finance Minister Giorgos Papaconstantinou had informed members of the troika of Greece’s intention to ask for a rescheduling. Klaus Masuch, the ECB’s representative, expressed the central bank’s opposition and left the meeting in Athens to phone the lender’s headquarters in Frankfurt.
Trichet’s emphatically negative response is evident in a letter that is in Kathimerini’s possession. Its language is far from diplomatic.
“I am writing to inform you about the grave risks that the Greek government would take if it were to pursue at this juncture a rescheduling of its debt, even on a voluntary basis [...] Pursuing such a strategy would put Greece's refinancing in euro at major risk,” wrote the French central banker.
He then becomes more specific. “The ECB Governing Council's decision to suspend the rating requirement for securities issued or guaranteed by the Greek government was based on the current programme, and the current programme being on track. No debt rescheduling is compatible with the current programme. Therefore the suspension would no longer apply.”
He adds that “even a voluntary debt rescheduling could lead to considerable downgrades of all other paper in Greece,” as a result of which the country would be “at immediate risk of losing the bulk of its collateral for monetary policy transactions.”
At this point, Trichet refers to the loosening of the ECB’s rules regarding the collateral that it accepts to lend to financial institutions. The central bank’s president informs the Greek prime minister in no uncertain terms that a decision to extend maturities would lead to the ECB pulling the plug on the support mechanism keeping the Greek banking system alive. The immediate effect of such a move would be to force Greece to leave the euro and print its own money to avoid the sudden death of its banks.
Finally, Trichet claims that a rescheduling of Greece's debt “could trigger very large losses for Greek banks, which in the absence of sufficient recapitalisation funds might have to be suspended from monetary policy transactions.”
For a bank to be financed by the ECB, apart from the necessary collateral, it also needs to have capital adequacy. Trichet warns that the damage the Greek banks would suffer – as the main holders of Greek sovereign bonds – from a restructuring would lead to them being excluded from even Emergency Liquidity Assistance from the Eurosystem. It is a problem that reared its head again after the Private Sector Involvement (PSI) in March 2012, especially between the two general elections in the summer of that year. The decision to continue funding Greek banks via ELA was only taken after anguished deliberation and because the second bailout program set aside 50 billion euros for the recapitalization of Greek lenders.
In closing, Trichet says that it is “absolutely key” that Greece abides by the terms, which would “put the Greek economy on a path that can ensure a smooth participation in EMU.” The fact that six months after writing this letter, and a few days before he retired, the ECB chief accepted a restructuring of Greek debt, including a haircut, underlines the degree to which the Greek and wider eurozone crisis is inextricably linked to developments in Berlin.
The discussion about rescheduling Greek debt had started well before April 2011. In its discussions with foreign investment banks and others, Greece had from the summer of 2010 emphasized that any talk of restructuring would first have to be approved by Berlin and Frankfurt. In the fall of 2010, Finance Minister Papaconstantinou attended a European roadshow to promote Greek bonds with members of the troika. Representatives of investment banks expressed concern about Greece’s funding needs, which exceeded 150 billion euros up to 2014-15. At around this time, the International Monetary Fund sent specialists to Athens, without the knowledge of the ECB and the European Commission, to examine restructuring options.
In the following months, the hopes that Greece would be able to fulfill the initial program and return to the markets in 2011 disappeared. At an international level, the agreement between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Deauville that private bondholders should also suffer losses spooked the markets, which then anticipated debt restructurings in the eurozone, with Greece as the most likely candidate. On the domestic front, resistance to the fiscal and structural adjustment program within the PASOK government grew.
“We had the impression of reform fatigue,” Lorenzo Bini Smaghi, an ECB executive board member at the time, tells Kathimerini. “The Greek government thought that a debt restructuring would mean it could avoid making the necessary difficult decisions.” Bini Smaghi spoke to Papaconstantinou on the sidelines of a conference on Lake Como at the end of January 2011 and told him just that when the Greek finance minister suggested there was a need for debt restructuring.
Dutch Finance Minister Jan Kees de Jager had also referred to the need for some kind of Greek debt reprofiling during January’s Eurogroup, only for Trichet to insist that this would upset the markets. “For us, the fact that it was still not clear what was going to happen with the European Stability Mechanism made the discussion about restructuring even more irresponsible,” said Bini Smaghi.
Under the IMF’s pressure, however, the Germans formed a different opinion. They knew that Greece would need more money and that the German parliament would not approve a new package without the involvement of private investors who held Greek bonds. Berlin began discussions with Eurogroup president Jean-Claude Juncker and bilaterally with France and the Netherlands after January. The talks lasted until May, by which time Berlin had arrived at its decision. Trichet’s unwilling acquiescence to restructuring, following his earlier strong opposition to the restructuring, which ended up being a lot deeper than initially expected, was not unrelated to the decision to exclude the ECB from the haircut imposed “voluntarily” by the PSI.