The private sector must be forced to bear an equal burden of sovereign debt defaults or restructuring by eurozone member states, according to one of the founding fathers of the European project.
Valéry Giscard d’Estaing, the former French president, told Emerging Markets that policymakers needed to “draw up the consequences” of the failure of a member state due to its sovereign debt.
But he dismissed fears that the Greek debacle threatened the single currency. “At this stage we need to stop questioning the strength of the euro on the basis of the incidents which affect the debt problems of some peripheral member states. The euro has not been - and is not – concerned.”
“We should return to the classic concept: negotiating the rescheduling of debt vis-à-vis public and private creditors under identical conditions,” he said.
His intervention came amid an angry debate between eurozone policymakers over whether creditors who hold billions of euros of private debt should be forced to accept “haircuts” on their assets in case of default.
Investors rushed on Friday to bet that Greece was set to default, pushing the yields on the debt-laden country’s 10-year government bond to record levels.
Investors rushed to sell Greek debt, pushing the price down and driving up the yield up 61.5 basis points to 16.75%, a new record. The spread over German 10-year bunds rose as investors for the safe haven of German debt.
The market rout marks the end of a turbulent week for the eurozone as it emerged that senior figures at the European Central Bank had clashed with finance ministers over their proposal for a “soft restructuring” of Greece’s E330 billion debt.
Jean-Claude Juncker, Luxembourg’s PM and the chairman of the committee of eurozone finance ministers proposed the idea of a “soft restructuring” or “reprofiling” to help limit the losses to private bondholders.
The proposal also known as “reprofiling” involved an extension to the maturities of Greek debt rather than forcing bondholders to accept “haircuts” – write downs on the value of their assets.
It emerged that ECB President Jean-Claude Trichet had stormed out of a meeting with Jucker earlier this month and on Wednesday Lorenzo Bini Smaghi, an ECB executive board member, warned policymakers “not to use meaningless phrases, as Greece will then have to pay a price”.
Economists have accused politicians of inventing new concepts in order to delay an inevitable default on Greek debt, which the EU and the International Monetary Fund had acted to present a year ago with a E110 billion bailout.
On Thursday Barry Eichengreen, professor of economics at the University of California, Berkeley and an acknowledged expert on the euro system, criticized this idea, saying reprofiling “simply stretched out the Greek debt without reducing its present value solves nothing”.
Stephen Lewis, chief economist at Monument Securities, a brokerage, said ministers were keenly aware that direct action to reduce the burden of Greece’s debt through restructuring or default could have “very severe economic and financial consequences for the whole of the euro zone and beyond”.
“Until this week, they have been concerned to avoid giving the slightest hint that restructuring or default might be in the offing,” he said.
Lewis said that the chief practical difference between reprofiling and the harder type of restructuring that has been the focus of market discussion over recent months is that the former does not require that bondholders take “haircuts”.