--Bundesbank president suggests Greek debt relief as reward for
reform
--Bundesbank's Weidmann weighs in on row between IMF and euro
zone over Greece
--Weidmann fears setting bad precedent with Greece
By Harriet Torry
BERLIN--The president of the Bundesbank, Germany's powerful
central bank, raised the possibility of a further write-down on
Greece's massive debt load, but only once Athens has fully
implemented the reforms it agreed to in exchange for international
aid.
The danger of offering a haircut on Greek debt before reforms
are implemented, however international lenders may eventually
choose to do so, is that it runs the risk of taking pressure off
Greece to follow through with overhauling its economy. Greece's
lenders see economic reform as the only way for Greece to be able
to shoulder its debt burden over the long term, said Jens Weidmann,
who is also a member of the governing board of the European Central
Bank.
With his comments, Mr. Weidmann entered a row between the
International Monetary Fund and euro-zone leaders over what needs
to be done before an installment of about EUR31 billion in loans
can be disbursed to Greece. The IMF has called on European lenders
to offer Greece debt relief and insists on drafting a clear path
towards debt sustainability by the year 2020. The Europeans,
however, only want to discuss how to keep Greece solvent to 2014,
when the current aid program expires.
Mr. Weidmann said it was an "open question" whether Greece
really needs debt relief now, saying it would only make sense if
given as a reward for implementing reforms.
"A haircut does not solve any problems," Mr. Weidmann said in a
speech in Berlin landmark Hotel Adlon at a conference of economic
leaders sponsored by the Sueddeutsche Zeitung newspaper. "But in
the end you will need to write off debt in order to enable Greece
to regain access to capital markets."
The problem with granting Greece debt relief before the country
has fixed its economy is that it could set a dangerous precedent,
taking the pressure off other euro-zone countries to continue
implementing punishing austerity programs in return for aid.
Mr. Weidmann's remarks follow similar comments by Belgian
Central Bank Governor and fellow ECB Governing Council member Luc
Coene earlier this week. Mr. Coene said governments will have to
take a write-down on their loans to Greece.
German officials have repeatedly ruled out forgiving any of the
loans to Greece. Any government write-down would be the first time
that German taxpayers would lose real money since Greece's crisis
began nearly three years ago, a move that Chancellor Angela Merkel
does not want to make less than a year before the next general
election.
Mr. Weidmann didn't specify whether the write-down he envisages
would affect the public sector loans to Greece and Greek bonds held
by the European Central Bank, or Greek bonds held by private
creditors, or both.
Earlier this year, private-sector holders of Greek bonds agreed
to a massive write-down on the value of Greek bonds. Attention has
now focused on whether it's the turn of the public
sector--euro-zone countries, the ECB, and the IMF--to write down
their Greek holdings and loans to help Athens get debt levels back
to manageable levels.
Greece aims to reduce its debt as a percentage of economic
output to 120% by 2020, from next's year's projected level of 190%.
However, as its economy contracts, the debt-to-GDP ratio is
expected to rise to 144% by 2020, far above the target.
The IMF and Charles Dallara, head of the Institute of
International Finance, have raised the idea of "official sector
involvement" or OSI, in other words cutting the debts governments
are owed by Athens. However, Greece's main creditors--the 16 other
euro-zone governments led by Germany--refuse to extend more loans
to Greece other than those already promised.
The Bundesbank president acknowledged writing down debts for
Greece would raise concerns over the incentives for other troubled
euro-zone countries to reform.
"With what logic and security can the Portuguese Prime Minister,
the Irish Prime Minister, still go into parliament and demand
further reforms to stick to the program when there is an example
that even without the agreed reforms it will still be financed or a
write-down agreed to, which is no more than a financial transfer?,"
Mr. Weidmann said.
Euro-zone finance ministers and central bankers are due to meet
next Tuesday to discuss Greece. They are waiting for a crucial
report on Greece's ability to manage its debt load, which has been
delayed by the disagreement between the IMF and euro-zone leaders
over the future of the Greek aid program.
-Write to Harriet Torry at harriet.torry@dowjones.com