April 28, 2015 / 5:30 PM / 4 years ago

Bundesbank head says euro state insolvency possible without system collapse

FRANKFURT, April 28 (Reuters) - The head of Germany’s Bundesbank criticised Greece’s government on Tuesday for failing to implement reforms and said it was possible for a country within the currency union to become insolvent.

“Member states must take responsibility for the consequences of their political decisions,” Jens Weidmann, also a member of the European Central Bank’s Governing Council, told an audience in Essen. “There must be a match between control and liability.”

“Ultimately, this requires the possibility of a state insolvency, without the financial system collapsing,” he said in the text of his speech.

Weidmann’s comments in Germany’s industrial heartland highlight misgivings among the country’s policymakers about Greece’s deteriorating finances and the unorthodox policies adopted by its leftist government.

“It is decisive that a functioning administration is established in Greece to move the economy and the state’s finances onto a sustainable course and, most importantly, that trust is built in a reliable course of reform,” Weidmann said.

The government of Alexis Tsipras “has again thwarted early hopes that this will happen,” Weidmann said.

The remarks came as Tsipras, elected in January on an anti-austerity ticket, said he was confident of reaching an outline deal with international creditors within two weeks, after shaking up his negotiating team and sidelining his finance minister.

Tsipras threatened, however, to call a referendum if Greece’s international lenders insisted on demands deemed unacceptable by his government, a move the head of euro zone finance ministers said there was no time for.

Turning to France, Weidmann said the euro zone’s second biggest economy after Germany had a particular responsibility within the currency bloc to put its public finances in order after missing a series of deficit targets.

“A currency union... can only reach stability when its member states run solid budgets... France is an important role model in this regard,” he said.

Last month, the European Union gave France two extra years until 2017 to cut its budget deficit to within prescribed limits, extending the deadline for the third time since 2009 as Paris struggles to enact economic reforms. (Reporting By John O’Donnell; editing by John Stonestreet)

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