Debt in the euro zone has entered the “danger zone,” the head of Germany’s Bundesbank said on Friday, calling for banks’ exposure to the debt of individual countries to be capped.
“In the euro area we are already in the danger zone – at least with regard to public debt standing at 91 percent and corporate debt at 105 percent,” Jens Weidmann said in the text of a speech to be delivered at a conference in Frankfurt.
“Sovereign debt needs to be backed by capital, and exposure to a single sovereign must be capped, just as is the case for any private debtor,” said Weidmann, who also sits on the European Central Bank’s decision-making Governing Council.
As regards Greece, in an interview with Germany’s Focus magazine, Weidmann said he was against an increase in emergency loans to the country. He accused the new government of losing a lot of trust. “Until last autumn, an improvement in the economy could be seen. But the new government has gambled away a lot of trust,” he was quoted as saying.
Weidmann rejected Greek claims that it will have trouble meeting its financial obligations. “I don’t buy the argument that they are financially overburdened,” he said.
He accepted that Greece’s overall debt is very high, but said the burden was more manageable due to lower interest rates and deals to extend repayment deadlines.
Asked whether Greece was in imminent danger of default, Weidmann replied: “Clearly, the governments of the other countries have the impression that a solution can be found. But we don’t have a lot of time.” He added that if a member of the currency union decides not to meet its commitments…then a disorderly default cannot be ruled out.”
The Bundesbank chief also expressed skepticism about the public statements of Greek government officials. “Generally speaking, I get the impression that the statements given by various members of the government can be very different, depending on the day and the audience,” he said. “Ultimately, that doesn’t inspire much confidence.”
[Reuters, combined reports]