ECONOMY

Greece insolvency risk ‘increasing by day’, says Bundesbank chief [Update]

The risk of Greece becoming insolvent is rising by the day as time runs out for Athens to strike a deal with its international backers, the president of Germany’s Bundesbank said on Thursday.

Talks between Greece and its creditors have been deadlocked over Athens’ rejection of demands for cuts in pensions and unpopular labour market reforms as conditions for releasing frozen bailout funds.

Ratings agency Standard & Poor’s downgraded Greek bonds deeper into junk status late on Wednesday, questioning whether Athens can pay its debts.

“There is a strong determination to help Greece,” Jens Weidmann said in a speech delivered in London. “But time is running out, and the risk of insolvency is increasing by the day.”

A Greek exit would call into question the euro membership of other indebted countries such as Italy and Spain, but Weidmann argued it was Greece itself that would stand to lose most from leaving the bloc.

“The contagion effects of such a scenario are certainly better contained than they were in the past, though they should not be underestimated,” said Weidmann, who also sits on the European Central Bank’s decision-making Governing Council.

“But the main losers in that scenario would be Greece and the Greek people.”

Weidmann described the recent, sharp rise in bond yields, led by German Bunds, as a “re-normalisation” after the ECB’s sovereign bond purchase programme, known as quantitative easing, had caused yields to fall to excessively low levels.

He added that, while the market was worried about a “Bund tantrum”, current levels of bond market volatility were not exceptionally high.

“In my opinion, the most recent rise in yields can be largely explained as a correction of a market overshooting – a kind of re-normalisation,” Weidmann said.

A long-standing opponent of the ECB’s QE programme, Weidmann warned about its side effects, such as making the central bank the governments’ largest creditor, thereby easing pressure on them to carry out needed economic reforms.

“I see risks and unintended side-effects that might outweigh the benefits in terms of an accelerated normalisation of inflation,” Weidmann said.

[Reuters]

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