Talk of restructuring worsened turmoil: Bini Smaghi

Eurozone officials' talk of a restructuring of Greece's debt was a key factor in the re-emergence of financial market jitters, Lorenzo Bini Smaghi, a member of the executive board of the ECB, has said.

The ECB has since last May bought around €75 billion ($108 billion) of sovereign debt through its securities markets programme. But with spreads between German bunds and peripheral debt at record highs, the programme is seen as having failed.

However, in an interview with Central Banking Publications, Bini Smaghi refused to accept this charge. "If you consider market conditions a year ago and what could have happened if we had not made these interventions, then I would say the programme has been a success. The threat of contagion was enormous, and not just in Europe, but across the Atlantic too," he said. "Had we not have intervened, then it would have been dramatic. We should think of what would have happened otherwise."

He instead pinned blame for the renewed jitters on two other factors. "First, the adjustment programme in Greece showed signs of fatigue, so we needed to get the government back on track. The other problem was that governments started talking openly about restructuring and immediately thereafter - in particular around mid-October - the spreads started to hike up again."

He added: "Talks about restructuring have distracted countries. There was a feeling that there would be some magic solution for countries without them doing their homework. We have lost time looking for hypotheses that would not work. So we're back to square one."

"Talks about restructuring have distracted countries. There was this feeling that there would be some magic solution for countries without them doing their homework. We have lost time looking for hypotheses that wouldn't work. So we're back to square one."

Seek help sooner
Greece's problems were worsened by it delaying the decision to ask for aid. "National authorities have Publish additional data to realise that if they wait too long before they ask the IMF to come in and help, then the cost goes up. If Greece had accepted help sooner, then markets would have accepted more quickly that Greece could get back on track," he said.

"It's a challenge for democracies to see that you have to act quickly and the longer you wait, then the more painful it is because markets put you into a corner."

The interview took place on Thursday 26 May. A full transcript will appear in the August edition of Central Banking journal.