WSJ UPDATE: Bundesbank's Weidmann: Greek Debt Write-Down Question Open

Date : 11/16/2012 @ 1:17PM
Source : Dow Jones News

WSJ UPDATE: Bundesbank's Weidmann: Greek Debt Write-Down Question Open

--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

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