Top German economist calls for ECB to join Greek haircut

The European Central Bank should help alleviate Greece’s debt burden by forgoing profits on its Greek bonds, but should not go as far as accepting losses, Wolfgang Franz, the head of a panel of German government economic advisers has told Reuters.

The ECB is under growing pressure to participate in Greece’s debt restructuring as the International Monetary Fund has raised concern that contributions from private bondholders may not be enough to bring the country’s debt down to sustainable levels.

Greece needs to strike a deal with creditors in the next couple of days to unlock its next aid package of 130 billion euro in order to avoid a chaotic default.

So far, the ECB is not involved in the talks, ECB Executive Board member Jose Manuel Gonzalez-Paramo said on Friday, but central bank sources have told Reuters the bank’s policymakers remain split on the issue of potential losses.

Franz said the bank may make a move once a deal is sealed with private creditors.

“(The ECB) is independent for a reason. No one can force it to do anything.”

“But of course, a central bank doesn’t necessarily need to make profits while others – banks, insurers, other investors – are bleeding,» Franz told Reuters in a telephone interview on Friday.

Franz, who heads Germany’s panel of so-called «wisemen» who advise the government on economic policy, said it was important that the ECB does not, under no circumstances, accept voluntary losses on its bonds as that would constitute state financing, something banned under European law.

The ECB has spent just under 40 billion euros on Greek government bonds and bought them on average at 75 percent of face value, according to sources.

That means that if the bonds mature the ECB will make about 12 billion euros in profits, roughly the amount needed to bring down the projected Greek national debt to 120 percent of gross domestic product (GDP) by 2020 after banks have taken their proposed losses.

However, if Greece cannot persuade enough private bondholders to sign up to a voluntary bond swap, it may force those holding out to agree to a deal that would then be enforced for all creditors, which could include the ECB.

Franz said he was not in favor of writing in so-called retroactive ‘collective action clauses’ to Greek bonds – a move that would force bondholders to take losses – as that was likely to trigger pay-outs of credit default swaps (CDS), an insurance against default of a company or country.

That could deal another blow to banks, and possibly result in them needing to be bailed out again.

Germany is already preparing for further repercussions from the euro zone debt crisis. Its parliament approved the reactivation of its Soffin bank rescue fund on Thursday.

“Nobody knows exactly who holds how many of them (CDS) and who would have to pay and who may even make a profit out of a Greek default,» Franz, who is also the president of the influential ZEW think tank, said.


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