ECB Bini Smaghi:Greece EMU Exit Would Only Worsen Debt Burden
FRANKFURT (MNI) - The idea of Greece leaving the Eurozone is "absurd" and would only serve to increase the country's debt burden, European Central Bank Executive Board member Lorenzo Bini Smaghi said Thursday.
"Certainly, if Greece were to exit the euro -- a hypothesis that I make just for the sake of reasoning, but which I consider absurd -- its debt burden would de facto worsen given that it is denominated in euro, and partial default or restructuring would in that case be unavoidable," the central banker said in a speech given at a conference in Frankfurt and released by the ECB Friday.
"However, thanks to the irrevocable nature of participation in the euro, the debt trap is avoided," he continued, adding that the country's debt issues remain its strongest incentive to stay in monetary union.
Speaking more generally, Bini Smaghi stressed the "non-negligible" impact of public debt levels on financial markets likely to continue over the next few years.
"We have seen in some cases how financial markets react to delayed fiscal consolidation, at times in a rather non-linear fashion," he said. "The uncertainties associated with such reactions make it very difficult for policy-makers to calibrate the appropriate budgetary path."
Furthermore, the risk of a "cliff effect", where market participants lose confidence in a state's ability to pay back its debts, as well as the contagion effects of such a loss of confidence, cannot be underestimated, the central banker continued.
Shifting his comments to global economic developments, Bini Smaghi warned that high debt levels could affect many parts of the global economy by boosting current account imbalances.
"The sheer asymmetry in size and composition of the fiscal stimulus in advanced countries compared with any measures taken in emerging economies is likely to magnify the expected resurgence of current account imbalances," he said.
(Market News.com)
