Drop Greek bond plan, urges ECB council member

Financial Times
January 5, 2012

Eurozone leaders should act to restore confidence in Europe’s monetary union by abandoning plans to involve private investors in slashing Greece’s massive debts, a senior member of the European Central Bank’s governing council has urged.

Writing in the Financial Times, Athanasios Orphanides, central bank governor of Cyprus, argues that dropping Greek “private sector involvement” would benefit the eurozone overall by lowering borrowing costs for other crisis-hit countries – and might be the only way to convince markets that investing in eurozone is safe again.

The ECB has long been wary of attempts to make eurozone bondholders take losses, even if voluntarily, because of the risk of “contagion” effects undermining confidence across the 17-country region. But members of its 23-strong governing council have previously argued that, once agreed, rescue plans should be implemented swiftly – rather than subject to constant change.

A former adviser to the US Federal Reserve Board, Mr Orphanides is among the ECB’s top-rated economists. His comments come at a critical time moment for Greece. The bond deal is the centrepiece of a €130bn second Greek bail-out negotiated in October to avoid a catastrophic default, and is expected to knock about €100bn off Greece’s €350bn debt pile. But details of the PSI deal have still to be finalised.

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