by Ralph Atkins
May 29, 2011
The FT spoke with Lorenzo Bini Smaghi, ECB executive board member, on May 27 in Frankfurt
Financial Times: Euro area membership was based on obeying fiscal rules. Surely those who break the rules should pay the price – even if that means defaulting or exiting the euro area?
Mr Bini Smaghi: You are correct that those who do not respect the rules should be punished, and this is what happens when countries agree to follow an IMF/EU adjustment programme. They have to adopt measures – fiscal and structural – which reverse their previous mistakes.
A debt restructuring, or exiting the euro, would be like the death penalty – which we have abolished in the European Union. On top of that drastic measures such as a default or restructuring would produce contagion effects in other countries and affect taxpayers in the other countries. Why should they pay for the mistakes of others?
FT Some argue that a Greek default would be the least worst-option for the euro area. The impact on the euro area would be containable and it would reinforce euro area principles long term. Why are they wrong?
LBS It would not be the least worst option - as we can see from the reaction of financial markets, not only within the euro area but also outside. The destabilizing effect could be quite dramatic. Those who say that the impact would be contained simply do not look at the data. It reminds me of those who in mid-September 2008 were saying that the markets had been fully prepared for the failure of Lehman Brothers.
All sophisticated indicators of systemic risk, cross correlations of CDS and yield spreads show a high sensitivity to restructuring moves and are at levels higher than in September 2008. Suggesting that there are no contagion risks is naïve and entails taking a risk that no responsible policy maker can afford, if he or she has any interest in the well being of its citizens.
In addition, default or restructuring would not help solve the problems of the Greek economy, problems that can be solved only by adopting the kind of structural reforms and fiscal adjustment measures included in the programme. On the contrary it would push Greece into a major economic and social depression.