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ECB steps up rhetoric against Greek restructuring

By David Mchugh

Associated Press

Published: Thursday, May 19 2011 9:21 a.m. MDT

FRANKFURT, Germany — The European Central Bank has stepped up its opposition to proposals that Greece not pay its debts on time — deepening a split with other top European officials over how to combat the eurozone's debt crisis.

Juergen Stark, a member of the bank's top six-member executive council, has indicated that the central bank would cut off Greek banks from emergency credit support in case of a restructuring — paying creditors later or less than the full amount.

That is a fierce rebuttal of comments by other top EU officials, who said they would not exclude a voluntary stretch-out of bond repayments.

Cutting off Greek banks would probably lead to bank failures, analysts say, as many of them depend on the central bank's emergency aid for day-to-day survival. ECB funding has been critical to pulling Greek banks through the crisis, since the bank has permitted Greek bonds as collateral despite ratings downgrades that under normal circumstances would have excluded them.

Analysts at RBS say the ECB has pumped €87.9 billion ($125 billion) in credit into Greek banks as of the end of March.

The bank has also bought Greek bonds to support Athens in the bond market — and would take losses itself along with other creditors in case of a restructuring.

"Debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible," Stark said. "So it is a very popular argument, that the only way out is debt restructuring but we should think this issue through — what the implications for banking, what the implications for the real economy are very likely to be."

Stark's comments were made Wednesday during a visit to Greece but only confirmed by the ECB on Thursday.

The split over whether to consider restructuring debt comes as European officials wrestle over whether to give Greece another bailout to keep it from a disastrous default that would shake Europe's currency union.

Greece got a €110 billion ($157 billion) bailout from the other eurozone countries and the International Monetary Fund last year after its financial troubles made it impossible for it to borrow money at affordable rates on the bond market.

Greece's economy has continued to sink under the burden of spending and tax cuts aimed at making the country creditworthy again, and the initial goal of returning to bond markets next year has faded. Ireland and Portugal have also taken EU-IMF bailout packages to avoid defaulting.

So far, the crisis is confined to the three small countries but the longer term fear is that their troubles might spread to larger euro members such as Spain who would be too large to bail out.

Jean-Claude Juncker, the head of the eurozone finance ministers' group, said Tuesday that he would "not exclude" a "reprofiling" of Greece's debt if it takes still more steps such as selling government property but still needs help beyond that.

Several bank officials, including Lorenzo Bini Smaghi, a fellow member of the ECB executive board, have this week rejected any talk of restructuring.

France's Finance Minister Christine Lagarde also said restructuring was "off the table."

Analyst Jacques Cailloux at RBS said the ECB was increasingly isolated in the debates over what to do about countries with too much debt. "This is the last card in the hands of the ECB in warning about the implications of a restructuring," Cailloux said. "The restructuring debate has now been so politicized that the decision is now becoming somewhat remote from the Central Bank."

The ECB's rift with other European policymakers dates back to a March EU summit that agreed on a comprehensive package of economic reforms. The ECB said they didn't go far enough, and has been urging the European Parliament to strengthen them.

Cailloux said there was no legal bar to the ECB cutting off a country's banks, but added that its responsibility to support financial stability would probably force it in the end to accept some kind of collateral. The central bank of Greece could also step in as lender of last resort on its own, he said.

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