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Banks should provision for risky EU debt -German govt advisor
February 3, 2011 / 11:02 AM / 7 years ago

Banks should provision for risky EU debt -German govt advisor

BERLIN, Feb 3 (Reuters) - Banks should be required to hold equity against lower-rated euro zone sovereign bonds, to ensure they can absorb losses if the bonds are restructured, a top German government advisor was quoted as saying.

“A basic requirement for aid must be that private creditors always participate,” said economist Wolfgang Wiegard, one of the five “wise men” that advise Chancellor Angela Merkel, in an interview published in Die Welt on Thursday.

Wiegard said such provisioning would reduce the risk that any haircuts banks were forced to take on their portfolios would compel them to seek another round of taxpayer-financed bailouts.

“Not if banks must hold capital for their risky sovereign bonds -- the worse the rating, the higher the amount of equity that banks should set aside,” he explained.

“Once that is reached, then the German taxpayer is for the most part out of the woods.”

Currently, German banks are not required to hold any equity against sovereign bonds from Greece, Portugal or Ireland, although they would have to for countries with similarly poor credit ratings that are not part of the European Economic Area.

Wiegard added that he had “reasonable doubts” about whether Greece would be able to avoid restructuring its public debt, which the European Union and IMF forecast will peak at 158 percent of GDP in 2013. [ID:nLDE70M06Q]

Wiegard, who teaches economics at the University of Regensburg, will be replaced next month by Lars Feld after 10 years as a member of the government’s economic advisory panel. (Reporting by Christiaan Hetzner; Editing by Catherine Evans)

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