July 13, 2011 / 8:31 AM / in 8 years

Weidmann sticks to ECB hardline on Greek collateral

FRANKFURT, July 13 (Reuters) - The euro zone’s rescue fund should not be used to buy back Greek bonds, ECB policymaker Jens Weidmann said on Wednesday, and reiterated the bank’s threat to stop accepting Greek debt as collateral if it defaults.

European Union leaders acknowledged for the first time this week that some form of Greek default may be needed to cut Athens’ debts and stop Italy and Spain being sucked further into the crisis.

In an interview with German newspaper Die Zeit, Weidmann who heads Germany’s Bundesbank, warned against an idea that has resurfaced in recent days, to use the euro zone’s rescue fund, the EFSF, to buy back Greek bonds.

“This discussion is partly in the wrong direction,” Weidmann said. “The money of the bailout should not be used for the purchase of government bonds in the secondary market. It would have high costs, low benefits and dangerous side effects.”

He added that the talk of reducing the interest on bailout loans was also not useful and repeated the ECB’s threat to stop accepting Greek debt as collateral if the country defaults.

“It is about central bank credibility. It is not our job to finance insolvent banks, let alone countries,” Weidmann said.

“Containment of the crisis should not mean that we undermine our principles. Therefore we must draw a red line,” adding it would go against the ECB’s principle of only providing liquidity to banks with sufficiently high quality collateral.

“Continuing to accept bonds in the event of a default would be a significant step too far,” he said.

Weidmann, one of the ECB’s Governing Council, also stuck to the ECB’s line that involving private bond holders in a Greek debt deal was not worth the uncertainty it would create.

“In the current environment it carries more risks than opportunities,” he said, adding that all the talk of private sector participation was rattling market confidence.

(Reporting by Marc Jones; Editing by Toby Chopra)

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