‘Austerity the only solution for Greece’

EUROPEAN Central Bank Governing Council member Christian Noyer ruled out a restructuring of Greece’s debt, calling it a “horror story” that would leave the nation shut out of financing for years.

“There’s no solution possible” for Greece other than its austerity programme, Noyer, Bank of France governor, said. “Restructuring is not a solution, it’s a horror story.” If the country fails to meet the terms of its bailout, Greek government debt will be “ineligible as collateral” at the ECB, he said.

ECB leaders and European Union policy makers are clashing over how to prevent the currency region’s first default, after €256 billion in bailouts to Greece, Ireland and Portugal failed to stop contagion from the debt crisis. A year after its €110bn rescue, Greece remains shut out of financial markets and the cost of insuring its debt against default is at a record high.

“The lengthening of maturities raises very difficult questions,” Noyer said. “There’s a strong chance it will be the equivalent of a default.”

Bank of France Governor Noyer’s remarks put him in line with ECB Executive Council members Juergen Stark and Lorenzo Bini Smaghi as well as Bundesbank president Jens Weidmann. All of them have said the Frankfurt-based ECB may stop accepting Greek sovereign debt as collateral if euro-area governments proceed with a plan to extend Greece’s debt repayment schedule.

European Union finance ministers on May 16 floated the idea of talks with bondholders over extending Greece’s debt-repayment schedule, saying the bailout has failed to restore the country’s financial health. On May 20, Fitch Ratings cut Greece’s credit rating to B+ from BB+, saying that extending its debt maturities would “trigger a credit event and default rating.”

To avert that possibility, Greek Prime Minister George Papandreou’s cabinet agreed to sell stakes in Hellenic Telecommunications Organisation by the end of next month, as well as Public Power Corp, Hellenic Postbank and the country’s ports. The state’s stakes in those three companies currently have a market value of €2.1bn.

The government, which also endorsed €6bn in budget cuts, said it would create a fund comprising assets to accelerate the sales, intended to raise €50bn by 2015. The bulk of that will come from selling €35bn of real estate.

EU policy makers have linked the possibility of further aid to Greece to faster asset sales and additional budget cuts. The Greek cabinet’s decision may allow EU and International Monetary Fund inspectors, due in Athens this week, to sign off on the bailout’s next installment of €12bn. Greece may have to stop paying its creditors if it does not receive the payment, Finance Minister George Papaconstantinou has said.

Greece now needs to implement the asset sales, reduce monopolies and improve tax collection, Bini Smaghi said in an interview with Austrian ORF radio broadcast yesterday.

Moody’s said that debt-repayment extensions — what European officials term “soft restructuring” — would constitute a default and shut Greece out of capital markets for a “sustained period.”

The ECB is also concerned that allowing Greece to renege on some of its obligations would create similar expectations for other indebted euro-area nations such as Ireland.