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Home > Blogs > Anthony Harrington > Greek debt restructuring: Junckers says yes, ECB says “Hell, no!”

Greek debt restructuring: Junckers says yes, ECB says “Hell, no!”

Greek debt | Greek debt restructuring: Junckers says yes, ECB says “Hell, no!” Anthony Harrington

For a man who recently rattled more than a few cages around Europe by proclaiming the necessity for “deep dark secrets” and for espousing the value of openly lying to the public and press to keep secrets secret, Jean-Claude Juncker, the chairman of the eurozone group of finance ministers would seem to be an unlikely candidate for blowing the gaff on the EU’s attitude to a Greek restructuring. But blow it he has, and has reportedly caused the President of the European Central Bank (ECB) Jean-Claude Trichet to blow his top in the process.

The blow-up happened at a crucial two day meeting of European finance ministers on Monday and Tuesday May 16-17. Juncker, in the eyes of both the ECB and, apparently, the French delegation, broke ranks by openly admitting that he and his colleagues were squaring up to what the markets have for some time now been regarding as an inevitability, namely a Greek default.  It didn’t soften the disagreement much that Junckers was very cautious in his comments. Reuters quoted him as saying:

"I have to repeat that a large restructuring is no option. Nobody was mentioning tonight the need of having a large restructuring. I wouldn't exclude in a definite way a kind of reprofiling. It's not reprofiling or nothing, it's measures and measures and measures and then maybe reprofiling."

Other media reports had Juncker making a distinction between a “soft restructuring” and a “hard restructuring”, the former being preferable to the latter, which would inevitably see bond holders taking a massive haircut. The Independent’s economics editor Sean O’Grady quoted Juncker as saying: “If Greece makes all these efforts (asset sales plus austerity measures plus tax increases) then we must see if it is possible to make a soft restructuring of Greek debt. I am strictly opposed to a major restructuring of Greek debt.”

For some, Juncker’s comments will be seen as no more than the EU facing up to the fact that whether the EU likes it or not, Greece’s position is untenable in the medium term, with medium term defined by the markets as no more than a three year time frame – at which point, or so the argument goes, Greece will be unable to meet escalating debt interest costs or to roll over its outstanding debt, thus precipitating default willy nilly, with massive losses for bond holders.

From this viewpoint, Juncker is being no more than sensible in facing up to the inevitable, and is arguably being too cautious anyway in his utterances. From the standpoint of the ECB, however, which would absolutely need to be refinanced if it took a hammering on all the Greek debt it has accepted as collateral from EU banks, Juncker’s comments are nothing short of  idiotic – more like a bomb than the thin edge of the wedge. The ECB’s argument is that any suggestion that the EU as a whole is acquiescing in a Greek default would be sufficient to precipitate a market crisis on a cosmic scale. From a bond holder’s perspective that would be like buying new debt knowing that you were going to lose at least 30% of your principal, or giving up at least 30 cents on every new euro lent. No one lends under those conditions.

FT Deutschland reported that Trichet stormed out of the meeting after warning that the ECB would respond to a reprofiling of Greek debt, whatever that meant, by refusing to buy any new Greek debt instruments and would also refuse to supply the Greek banking system with any further liquidity. In fact, since the ratings agencies would be certain to respond to any Greek “reprofiling” by downgrading Greek debt still further, that would drop it below even the current minimum criteria set by the ECB for accepting collateral. Such action by the ECB would erase, at a stroke, any distinction Juncker is apparently trying to make between a soft restructuring and an out and out default by leaving Greece with no choice other than to default. Which goes to show that perhaps Juncker should have stuck with his original preference for “deep dark secrets” and not been so forthcoming in his press comments.

Further reading on Greek debt and the sovereign debt crisis:

Tags: credit rating agencies , default , ECB , Greek debt , Jean-Claude Juncker , Jean-Claude Trichet , sovereign debt
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