FRANKFURT (Reuters) - The European Central Bank will not soften its strong opposition to a Greek debt restructuring, outgoing Executive Board member Gertrude Tumpel-Gugerell said on Tuesday.
Tumpel-Gugerell told Reuters that giving Greece more time to pay back its debts would amount to a default no matter how it was presented.
Asked whether a full restructuring of Greek debt or the milder reprofiling that has been touted recently was an option the ECB could live with, she strongly rebuffed the idea, saying: “It is not an option.”
Asked whether the ECB might soften its stance once the European Commission, international Monetary Fund and ECB had sat down with the Greek government after the latest assessment of Athens’ progress, she was equally clear. “It is not the case.”
She declined to comment on whether a debt rollover — private investors voluntarily agreeing to buy more Greek debt once current bonds expire — might satisfy the ECB.
A number of top ECB policymakers have been deliberately blunt in their warnings of the consequences of a Greek debt restructuring in recent weeks.
Jurgen Stark and Jose Manuel Gonzalez-Paramo have both said it could be more damaging than the collapse of Lehman Brothers, while Lorenzo Bini Smaghi has warned it would be a death sentence for the Greek banking system.
“I do not talk about horror scenarios,” Tumpel-Gugerell said, but she went on to warn about the lasting damage a restructuring would have on the euro zone’s reputation and investor confidence in the bloc.
“We are working on the basis of contracts. There have been bonds issued under certain conditions and the investors expect that these conditions are met,” she said.
The ECB is finding itself increasingly isolated in the debate on how to tackle Greece’s debt problems. Financial markets believe a restructuring is on the cards, expectations that have firmed since Eurogroup chairman Jean-Claude Juncker admitted recently Greece may need more time to repay its debts.
The ECB has since hit back. Stark, Bini Smaghi and new Bundesbank head Jens Weidmann have all said a restructuring would invalidate the deal under which the ECB continues to accept Greece’s junk-rated debt as collateral for loans.
Tumpel-Gugerell echoed the strong stance. “We have a very clear framework of what is collateral and what it is not. If we trust that a country fulfils the conditions of (EU/IMF) the program in place, we are ready to accept their collateral,” she said.
Whilst the ECB shutting Greek banks out of its mainstream lending operations would not be welcomed, it may not result in the instant collapse that some commentators have warned of.
The banks would still have back-door access to funding via Greece’s national central bank which could provide Emergency Liquidity Assistance (ELA), something the Irish central bank is currently doing for its domestic banks.
The difficulties are, however, complicating the ECB’s decision on whether or not to restart the phasing out the liquidity support it gives to euro zone banks in July.
Whilst acknowledging that banks in debt-strained countries remained locked out of open bank-to-bank lending markets, Tumpel-Gugerell said the core of the money market was now back on its feet after the trauma of the financial crisis.
“If you look at the money market nine months ago and the money market today, volumes have increased and volatility of interest rates has decreased. We see that our liquidity is much less needed by the majority of the counterparties.”
“A major part of the market has gone back to normal functioning, so what is needed for the other banks is deleveraging, recapitalization, the ability to lend and the recovery of the economies in the countries concerned.”
The ECB meeting next Thursday is also crucial because the bank is expected to give a signal it will raise interest rates in July to 1.5 percent.
The decision will be heavily influenced by new ECB staff economic forecasts. Economists will be looking particularly closely at the 2012 figures to get a better idea of the ECB’s medium-term inflation view that typically steers its interest rate decisions.
Tumpel-Gugerell suggested there would be no dramatic shifts in those key numbers.
“We will get the new projections soon but I am confident that inflation expectations remain anchored,” she said.
Nevertheless, she also brushed off the suggestion that the recent drop in commodity prices had relieved some of the inflationary pressure and therefore the need to raise rates.
“We should not over interpret short term developments, it is also important to look at the structural needs we have in certain markets. The long term structural demand for energy for food, of course this also has an impact on price levels.”
“It is important that since the recovery has become stronger that we do not see second round effects, therefore I think our interest rate increase (in April) was a step in the direction that we are clear that we want to anchor inflation expectations.”
Writing by Marc Jones; editing by Patrick Graham