The involvement of the private sector in the Greek bailout has eroded investor confidence in euro zone sovereign debt and raised pressure on borrowing costs, despite policymakers’ efforts to reassure markets that Greece is an isolated case.
“Reversing the Greek private sector involvement decision would also raise the financing costs on the Greek government, but by restoring trust in the euro zone it would reduce the financing costs of other euro zone governments,” Orphanides wrote in the Financial Times. A 30-year loan to Greece on a low interest rate from other countries could accompany the reversal of private sector involvement, he said, helping to keep its financing costs in line with present fiscal plans.
While the idea of ensuring that investors understood they should price in risks associated with sovereign debt may have made sense, it has not functioned in practice, Orphanides said at an economics conference in Chicago. “It is a thoroughly inefficient way of dealing with the moral hazard issue that we are still paying for now,” he said.
One euro zone government official said that behind the scenes there was no talk of dropping PSI for Greece. An ECB spokesman declined to comment on whether Orphanides’ views represented the position of the ECB as a whole.
However, the ECB warned government leaders when they set out on a path of private sector involvement (PSI) in 2010 that the policy posed a risk for investors’ trust in sovereign debt. A euro zone central bank official noted that Orphanides had published his comments ahead of fresh talks this month on Greek PSI and that Cypriot banks are heavily exposed to Greek debt. Banks and investment funds have been negotiating with Athens for weeks on a PSI scheme under which they will accept a nominal 50 percent write-down on their Greek bond holdings in return for a mix of cash and new bonds.
“In the markets people are worried that they will come up with 70, 80 or 100 percent haircuts next,” said Berenberg bank economist Christian Schulz, adding that Orphanides’ comments would help limit Greek PSI to a 50 percent write-down. But Schulz, a former ECB economist, doubted PSI in Greece would be dropped altogether. “That would be great that would certainly be a positive surprise,” he said. “But I’m not expecting that to happen.—AFP