Greek debt restructuring must be 'voluntary'
The Governor of the Finnish Central Bank has said that any restructuring of Greek debt must be done on a "voluntary" basis. He emphasised uncertainty in the markets should be avoided at all costs.
In an interview with the BBC's Business Daily, Erkki Liikanen, who serves on the Governing Council of the European Central Bank, told Lesley Curwen that the debt situation in Greece could "rebound" into another financial crisis if not handled responsibly.
Erkki Liikanen: For me things changed in summer 2007, so almost four years ago when there were disturbances in the bank markets. They were like first step into financial crisis which went wide open in autumn 2008. Then we had financial crisis which led to great recession. And as it normally does after a great recession, you have a sovereign debt crisis. Because when recession comes, tax revenue collapses and the countries get indebted. Now, of course, the problem is that if we can't contain the sovereign debt crisis, it may rebound to financial or economic crisis and deepen things again.
Lesley Curwen: So you are saying it could be a second leg of the crisis?
Erkki Liikanen: Rebound is a possibility and for that reason it is very important to tackle the issue of sovereign debt everywhere. It is not only European problem. You can look at the debt figures in the United States, Japan, UK, everywhere. I mean they are very high. The emerging economies are doing fine with their debt level.
Lesley Curwen: Jean-Claude Trichet has said and indeed you've kept reiterating too 'The ECB is not in favour of restructuring and haircuts. We exclude all concepts that are not purely voluntary.' So, voluntary is the way forward for the bond holders to accept that they are going to have to lose some money?
Erkki Liikanen: Voluntary is the way forward because then you can avoid selective defaults or credit events which are the important issue here.
Lesley Curwen: What are credit events for those listeners who don't know?
Erkki Liikanen: It is actually a legal term in the sense that when there is uncertainty about the issue whether debts are paid or not.
Lesley Curwen: So when you say voluntary that means the bond holders would agree to it, but they don't really have much choice, do they?
Erkki Liikanen: Voluntary means voluntary.
Lesley Curwen: Is any kind of restructuring of Greek debt effectively a default? If Greece can't make the payments, things were adjusted so that it pays less or it pays the money over a longer period of time, surely that's a default, isn't it?
Erkki Liikanen: I don't go to that discussion or terminology. I mean they are many who participate. I just want to reiterate that we exclude measures which include compulsion. They should be based on voluntary solutions.
Lesley Curwen: There will be some people listening who will think, why don't you just let Greece default, call a spade a spade and stop the succession of fudges and compromises which we've had so far?
Erkki Liikanen: When we have agreed on the program, restated program, it's very important in the national cooperation that they can trust each other as well. That is the first issue. And the second issue of course is the question of contagion. If there is uncertainty, it can spread from one country to the other and then can have negative consequences for the European economy and many people fear also for the global economy.
Lesley Curwen: So at all costs, you have to avoid the appearance of a default which could really frighten the markets. That's what you are saying?
Erkki Liikanen: Every party must do what they have been committed to, and of course the key issue always is in the country concerned, because if you get into difficulty, if your fiscal deficit is too high, if your indebtedness is too high, it is at home you need to take measures. The key actions must be taken by the government concerned and the parliament of course in the country must support.
Lesley Curwen: And that's a difficulty, isn't it, will the country actually accept what the government is trying to sort out?
Erkki Liikanen: That is difficult, but there is no other way if your financing dries up.
Lesley Curwen: Let me ask you something else. Finland, the Netherlands and Germany, have all taken a rather different view about this crisis, haven't they, in the response to Greece. Why is that?
Erkki Liikanen: These countries have tradition of a prudent fiscal policy. Let's say their deficits have been relatively low and debt levels are not high either. I know more about Finland. In Finland for instance, when the country had a big financial crisis in early 1990s, major efforts had to be done to adjust the fees costs of the public sector to the level of the tax revenue. It was done, but it was difficult. So in Finland people think that why those who have not followed the same rules must be helped.
Lesley Curwen: You have taken the pain?
Erkki Liikanen: That is yes, and that is the issue, and that has been politically difficult. But of course the reply is that if we give only support which is heavily conditioned, so that these countries stick to a program and they get their house back in order, we save this kind of external impact on our economy. We must avoid a sovereign debt issue, have this kind of external impact for our economies.
Lesley Curwen: Are you saying that the sovereign debt issue could have the same impact as Lehman Brothers did?
Erkki Liikanen: They are very different, but of course I mean sovereign debt issue can be a real challenge and it's not only your area issue, it's European and global.
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