Bini Smaghi Opposes Maturity Extensions for Greek Debt
By NINA KOEPPEN And BRIAN BLACKSTONE
FRANKFURT—An extension of Greece's debt maturities would do little to solve the country's unfolding debt crisis, a top European Central Bank official said Monday, insisting that Athens press ahead with painful austerity measures to shore up its finances.
In a video interview with The Wall Street Journal that touched upon Greek's debt crisis and inflation in the euro zone, ECB Executive Board Member Lorenzo Bini Smaghi, warned that extending the maturities on Greek debt could lead to a credit event, and forecast that inflation in the bloc would stay above the ECB's sub-2% objective "for quite a few months."
In a video interview with Dow Jones Newswires and The Wall Street Journal, ECB Executive Board Member Lorenzo Bini Smaghi warned that inflation in the euro bloc could stay above the ECB's sub-2% objective "for quite a few months," an indication that further interest-rate increases are likely.
"The problem is that the extension of maturities would not have a big impact on the sustainability of the debt and it would probably trigger some kind of credit event," Mr. Bini Smaghi said, when asked about a voluntary maturity extension for Greek bonds.
"It is very difficult to distinguish between just a lengthening of maturity and a credit event," he said, though he added, "This kind of thing has to be studied."
Financial markets have increasingly come to the conclusion that a restructuring of Greece's debt is inevitable, reasoning that even if Athens successfully implements its economic reform and fiscal austerity promises, it faces many years of subpar economic growth. Some analysts see a maturity extension as an interim step toward an eventual reduction in the face value of Greek bonds, a measure known as a haircut.
Like others on the ECB, Mr. Bini Smaghi is adamantly opposed to a restructuring, saying it would have a crippling effect on the Greek economy.
"If we would have a debt restructuring, the Greek banking system would have enormous difficulties in terms of sufficient capital. [Banks] would have no access to financing and there would also be contagion to other countries," he said. "This is really not a good scenario for Europe."
The ECB faces a difficult task as it balances the fiscal and economic crises in Greece, Ireland and Portugal with the robust growth in the region's core, including Germany and France. The euro zone grew more than 3%, at an annualized rate, during the first quarter, led by Germany.
Though some moderation is likely, the GDP report "shows that the recovery is on track and it is broad-based. That provides the environment for the kind of policies we are implementing," Mr. Bini Smaghi said.
Euro-zone inflation was 2.8% in April, according to final figures released Monday from the European Union's statistics agency, a two-and-a-half-year high. Many economists expect inflation to crack 3% in the next few months as the effect of higher energy and commodity prices earlier in the year work their way through to final prices.
Mr. Bini Smaghi in the interview hinted that further interest-rate increases are likely. "Our expectation is that inflation will stay above 2% for quite a few months," he said. "If there is a risk that it stays there for longer, then it is of course our responsibility to act and we'll do what is needed to bring back inflation below 2%."
The ECB raised interest rates last month for the first time in nearly three years to stem the rise in inflation, the first central bank among major developed economies to do so. But it paused at a meeting earlier this month, and comments from ECB President Jean-Claude Trichet signaled that the next rate increase is unlikely to occur before July.
"The recent data are more or less in line with our scenario, so this underpins our monetary policy and our recent decisions," Mr. Bini Smaghi said, adding that officials want to see the ECB staff's June economic and inflation forecasts before deciding on further steps.
Mr. Bini Smaghi's professional future is the subject of much speculation in financial markets. Mr. Bini Smaghi, who has an economics doctorate from the University of Chicago, is considered one of the ECB's most influential and provocative members.
If, as widely expected, Bank of Italy Governor Mario Draghi becomes the next ECB President when Mr. Trichet's eight-year term expires at the end of October, it would give Italy two seats on the ECB's six-member Executive Board. France would be shut out of the Frankfurt-based committee, which runs the ECB's day-to-day operations.
To avoid that scenario, analysts expect Mr. Bini Smaghi will be offered a top policy-making job outside of Frankfurt to make room for a French official. His eight-year term as a board member ends in two years. Although there is no official rule limiting any country's representation at the ECB's top ranks, there have never been two executive board members from the same country at the same time.
"I have a job until 2013, so my plans are here," Mr. Bini Smaghi said when asked about his future.
