FRANKFURT (MNI) - The troubled peripheral Eurozone countries of Greece, Portugal and Ireland are clearly different from other Eurozone states, but the market calculus could change should a restructuring of Greek debt produce a contagion effect, European Central Bank Vice President Vitor Contancio said Wednesday.
At a press conference where he presented the ECB's Financial Stability Review, Constancio noted the recent increase in spreads on the sovereign debt of some other Eurozone countries. "I would not draw any conclusion from what has happened over the past few days," he said. "There is a very clear-cut distinction between those three countries and all the others."
However some forms of private creditor participation in a new Greece bailout package currently being negotiated could quickly change the situation, he warned, adding that this was one of the reasons why the ECB rejected the idea of a default in any guise for Greece.
He reiterated the ECB's rejection of any sort of "default with a haircut, or any form of private sector involvement [PSI] that can lead to a credit event or a rating event."
However, the ECB is "not against all forms of PSI," he said, noting that "some sort of Vienna type initiative could be conceived."
The ECB is currently locked in a debate with Germany over the best way to get some private sector contribution to the next Greek bailout. Germany wants an agreement by which private institutions that hold Greek bonds agree to exchange them for new debt with an extension on the maturity of seven years.
The ECB opposes this, fearing it would look too much like coercion and be considered -- by rating agencies, financial markets and creditors' lawyers -- as tantamount to default. Instead, the ECB has said that something akin to the Vienna Initiative -- used for Eastern European debtor states in 2008-09 -- might be acceptable. This involved the voluntary rollover of debt as it matured.
However, Constancio made clear it was not up to the ECB to launch such an initiative. "We were not the organization that proposed that a PSI should be organized right now. So it is not up to us to organise solutions," he said. He added, however, that there "are certainly forms that can achieve" private creditor participation without precipitating a default.
Constancio warned that the impact on Greek banks were there to be a default or partial default on sovereign Greek debt would be "quite dramatic," though he declined to estimate the financial impact and reiterated that the ECB doesn't think there will be that kind of restructuring.
"If there would be something that we don't believe will happen, that of course will impact the collateral of all the banks that have presented Greek government paper as collateral," he cautioned.
Constancio asserted that financial conditions and the financial sector in the Eurozone have improved, and this has "helped the economic recovery that is also ongoing."
But the euro area still faces grave challenges, he said, citing as the most pressing risk the "interconnection of the sovereign debt crisis and the financial system. This is at the core of the challenges of financial stability that we face." This was also highlighted in the Financial Stability Review as the biggest threat facing EMU.
However, "in spite of these problems that we face, we do not anticipate that it will derail the recovery," Constancio said. "That is reflected in the [economic] projections...and it is our main scenario."
He said the threat must be tackled in two ways. The first is the EU/IMF fiscal and economic adjustment programmes in Greece, Ireland and Portugal, coupled with liquidity assistance.
The second action needed is to "recapitalize, restructure and increase the transparency of the financial sector and take advantage of the forthcoming stress tests to clarify the situation of the banks in Europe and when there is the need to recapitalize to respond to problems that the stress tests may reveal."
He urged the three countries under EU-IMF programmes to implement them fully. "These programs will strengthen the fundamentals of these markets and the aim of course is that markets down the way will recognize that," he said.
Constancio elaborated on one of the risks highlighted in the ECB's report, namely the possibility of an unexpected global increase in long-term interest rates that could hit bank profitability and economic activity.
"It may be related to sovereign debt in advanced economies," and could also result from a decline in the savings rate in emerging economies over the longer term, which would "also affect long-term interest rates," he said.
But he downplayed the risk, saying that, "it is certainly a risk that we identify and point to, but it is not present now."
Constancio dismissed the notion of a "mini-default" in the United States.
"I don't now exactly what is meant by this mini default. A default of any size is not anticipated regarding the U.S.," he said. "The risks that some highlight is that yes the medium and long term yield may go up, so the valuation of debt instruments may come down."
Constancio also attested to an improvement in the situation of large banks compared to the crisis years 2008-2010.
"The improvement in the economic situation is reflected in lower levels of loss provision, and that of course helps the profit and loss accounts of the banks," he said. He noted that capital ratios had also improved, "so both profitability and robustness of these banking groups have improved."
However, profitability is not yet back to pre-crisis levels and may not get there anytime soon, he cautioned. "Nevertheless, it is a healthy situation that has developed in Europe."
Source: http://imarketnews.com
At a press conference where he presented the ECB's Financial Stability Review, Constancio noted the recent increase in spreads on the sovereign debt of some other Eurozone countries. "I would not draw any conclusion from what has happened over the past few days," he said. "There is a very clear-cut distinction between those three countries and all the others."
However some forms of private creditor participation in a new Greece bailout package currently being negotiated could quickly change the situation, he warned, adding that this was one of the reasons why the ECB rejected the idea of a default in any guise for Greece.
He reiterated the ECB's rejection of any sort of "default with a haircut, or any form of private sector involvement [PSI] that can lead to a credit event or a rating event."
However, the ECB is "not against all forms of PSI," he said, noting that "some sort of Vienna type initiative could be conceived."
The ECB is currently locked in a debate with Germany over the best way to get some private sector contribution to the next Greek bailout. Germany wants an agreement by which private institutions that hold Greek bonds agree to exchange them for new debt with an extension on the maturity of seven years.
The ECB opposes this, fearing it would look too much like coercion and be considered -- by rating agencies, financial markets and creditors' lawyers -- as tantamount to default. Instead, the ECB has said that something akin to the Vienna Initiative -- used for Eastern European debtor states in 2008-09 -- might be acceptable. This involved the voluntary rollover of debt as it matured.
However, Constancio made clear it was not up to the ECB to launch such an initiative. "We were not the organization that proposed that a PSI should be organized right now. So it is not up to us to organise solutions," he said. He added, however, that there "are certainly forms that can achieve" private creditor participation without precipitating a default.
Constancio warned that the impact on Greek banks were there to be a default or partial default on sovereign Greek debt would be "quite dramatic," though he declined to estimate the financial impact and reiterated that the ECB doesn't think there will be that kind of restructuring.
"If there would be something that we don't believe will happen, that of course will impact the collateral of all the banks that have presented Greek government paper as collateral," he cautioned.
Constancio asserted that financial conditions and the financial sector in the Eurozone have improved, and this has "helped the economic recovery that is also ongoing."
But the euro area still faces grave challenges, he said, citing as the most pressing risk the "interconnection of the sovereign debt crisis and the financial system. This is at the core of the challenges of financial stability that we face." This was also highlighted in the Financial Stability Review as the biggest threat facing EMU.
However, "in spite of these problems that we face, we do not anticipate that it will derail the recovery," Constancio said. "That is reflected in the [economic] projections...and it is our main scenario."
He said the threat must be tackled in two ways. The first is the EU/IMF fiscal and economic adjustment programmes in Greece, Ireland and Portugal, coupled with liquidity assistance.
The second action needed is to "recapitalize, restructure and increase the transparency of the financial sector and take advantage of the forthcoming stress tests to clarify the situation of the banks in Europe and when there is the need to recapitalize to respond to problems that the stress tests may reveal."
He urged the three countries under EU-IMF programmes to implement them fully. "These programs will strengthen the fundamentals of these markets and the aim of course is that markets down the way will recognize that," he said.
Constancio elaborated on one of the risks highlighted in the ECB's report, namely the possibility of an unexpected global increase in long-term interest rates that could hit bank profitability and economic activity.
"It may be related to sovereign debt in advanced economies," and could also result from a decline in the savings rate in emerging economies over the longer term, which would "also affect long-term interest rates," he said.
But he downplayed the risk, saying that, "it is certainly a risk that we identify and point to, but it is not present now."
Constancio dismissed the notion of a "mini-default" in the United States.
"I don't now exactly what is meant by this mini default. A default of any size is not anticipated regarding the U.S.," he said. "The risks that some highlight is that yes the medium and long term yield may go up, so the valuation of debt instruments may come down."
Constancio also attested to an improvement in the situation of large banks compared to the crisis years 2008-2010.
"The improvement in the economic situation is reflected in lower levels of loss provision, and that of course helps the profit and loss accounts of the banks," he said. He noted that capital ratios had also improved, "so both profitability and robustness of these banking groups have improved."
However, profitability is not yet back to pre-crisis levels and may not get there anytime soon, he cautioned. "Nevertheless, it is a healthy situation that has developed in Europe."
Source: http://imarketnews.com
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