* Risks from restructuring far-reaching and incalculable
* Speculation based on false assumption Greece insolvent
* Illusion to think restructuring could solve its problems
* ECB signalled gradual rise in benchmark rates
(Adds details, background)
AACHEN, Germany, May 13 Restructuring Greece's
sovereign debt would pose potentially incalculable risks to the
overall euro zone and will not solve the country's fiscal
crisis, a senior European Central Bank official said on
Speaking in the German city of Aachen, ECB Executive Board
member Juergen Stark warned that market speculation over a debt
restructuring was based on the "false assumption" that Greece
"I would warn against underestimating the massive harmful
effects a debt restructuring would cause for the country
involved and for the euro zone as a whole," he said, adding the
risks would be far reaching and effectively incalculable.
Debt sustainability would be hurt since companies would
postpone their investments out of uncertainty, throttling
growth and increasing its obligations as a proportion of the
Additionally the domestic banking sector would be brought
to the edge of insolvency, forcing the government deeper into
the hole as it bailouts lenders.
"Moreover it is very well conceivable that the risks for
financial market stability could spread to other European
countries," he said.
"The idea that one could then solve a fiscal crisis through
a simple debt reduction (resulting from a restructuring) is
consequently an illusion," Stark continued.
Instead he said the solitary alternative for a lasting
solution to the crisis was for Greece and other indebted euro
zone countries to continue on their path of painful austerity
measures and comprehensive structural reforms.
Any debt restructuring would have the opposite effect, and
weaken the incentives for a government to push through
unpopular reforms and harsh budget cuts.
"In the case of Ireland and Portugal there is broad support
and accountability. I expect this will soon be the case in
Greece as well," Stark added.
While he expected the euro zone to eventually increase in
its membership from the current 17 EU states participating, he
added that none of the remaining 10 currently could withstand
the rigorous convergency criteria needed to adopt the euro.
He was addressing an event held ahead of Aachen's
prestigious Charlemagne Prize on June 2 that will be awarded to
ECB President Jean-Claude Trichet.
A hardliner when it comes to price stability, Stark left
little doubt once again that further ECB rate hikes were on the
agenda to keep inflation expectations well anchored.
"We never said that we would raise rates every month or
every two to three months, we said we would raise them
gradually," he said on Friday. The Frankfurt-based central bank
hiked lending rates for the first time in almost three years
last month after headline euro zone inflation surged past the
threshold it uses to define price stability, which is below but
close to 2 percent.
The market currently is pricing in two further hikes before
the end of the year, with the next one generally expected to
come in July. ECBWATCH
(Reporting by Matthias Inverardi in Aachen and Christiaan
Hetzner in Frankfurt; Editing by Chizu Nomiyama)