May 18, 2011

IMF Warns Greece: Reform or Restructure

ECB, many euro zone governments opposed to restructuring

According to an IMF envoy monitoring Greece’s progress in implementing reforms to drive down its debt, those reforms aren’t coming fast enough and that could have dire consequences for Athens. But restructuring, a taboo subject till earlier this week, is vehemently opposed by both the European Central Bank (ECB) and euro zone governments wary of the fallout from such an action.

Poul Thomsen, the envoy, said in a Reuters report, "The program will not remain on track without a determined reinvigoration of structural reforms in the coming months. Unless we see this invigoration, I think the program will run off track."

The dreaded "R" word, restructuring, was first broached by Jean-Claude Juncker, head of the 17-nation euro zone, earlier in the week. On Wednesday he was reported to say on Austrian radio, "If all this happens we will have to address the issue of whether a light restructuring of Greek debt could be pursued in which maturities are lengthened, with respect to debt servicing, and interest rate levels [on EU loans are reduced]. Greece must not be allowed to become a black hole."

Angry taxpayers are driving some European leaders to consider sharing the burden of bailouts with financial institutions, and Wolfgang Schaueble, German finance minister, was reported to say in a Brussels speech, "During the crisis, it was almost exclusively European taxpayers that ultimately bore the risk of investors' decisions. That is inadmissible. It was right to stop financial markets from disintegrating in the past but it would be wrong to cushion their losses in the future."

Juncker may have been the first to openly talk about restructuring, but such a notion does not have the unanimous backing either of member nations or of the ECB. The ECB, holding up to 50 billion euros ($71.032 billion) in Greek debt, has said that even a soft restructuring could destabilize the entire euro zone. Various board members voiced their opposition to any modifications.

"I'm opposed to soft restructuring because I don't know what it means. Nobody knows what it means," Lorenzo Bini-Smaghi, a member of the ECB’s executive board, was quoted saying. Another board member, Juergen Stark, gave a warning against any kind of restructuring, saying that belief in such a move as a solution to Greece’s problems was an “illusion.” He said, "A debt restructuring will wipe out part or all the capital of Greek banks, so it is a recipe for catastrophe. If the [economic adjustment] program is implemented one- to-one, then debt sustainability is ensured and Greece is solvent." And Vitor Constancio, vice president of the ECB, said restructuring would result in “enormous consequences” and should be a last-resort action.

Even Greece’s prime minister, George Papandreou, said that the cost of restructuring would “far outweigh any potential benefits”; he pledged to initiate a “full-fledged attack” on tax evasion in an effort to forestall the need for such drastic action.

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