Advisor warns against major debt reduction policy in Greece

ATHENS: A senior advisor to the Greek premier and formerly an ECB vice-president, on Sunday warned against a major cut in the country's massive debt, currently being discussed at an EU summit in Brussels.

While such a move would in theory help Greece by reducing its debt service costs, the resulting damage to the banks and so the economy could be huge, and the gains overall less than expected, Loukas Papademos said.

"The potential economic benefits of a debt restructuring will be much smaller than what is frequently forecast and the procedure entails important dangers for Greece and the euro-zone," Papademos wrote in To Vima weekly.

Greece has a debt mountain of over 350 billion euros ($487 billion) and faces crushing interest repayments in coming years.

The European Union in July agreed a supplementary rescue package on top of a 110-billion-euro bailout loan set up last year to help Athens cope.

But EU policymakers have realised that a voluntary 21-percent 'haircut' on Greece's nominal debt borne by private creditors which is an integral part of the July plan may not be enough.

European leaders meeting in Brussels on Sunday are debating a recommendation by their finance ministers that banks be asked to accept a write-down on their Greek government bond holdings of at least 50 percent.

Papademos warned in his Sunday opinion piece that in reality, less than half of Greece's debt would be beneficially open to restructuring.

He noted that in July, nearly 30 percent of a central government debt of 366 billion euros was in the hands of Greek banks, pension funds and insurance firms whose losses in a haircut would have to be offset by the cash-strapped Greek state.

Another 30 percent held by the International Monetary Fund, European Central Bank and other official institutions "cannot be restructured for political and legal reasons," he added.

"As a result, only around 40 percent of Greece's total public debt, held by foreign private investors, could bring net economic benefits. A 50-percent haircut will reduce the total debt by about 20 percent," Papademos said.

Greece's main industry lobby group and the head of the country's fourth-largest bank have also publicly warned against a greater debt reduction than that agreed in July because of the danger to the banks.

Officials in Brussels have agreed in principle that more than 100 billion euros should be made available to European banks if they need to bolster their capital after a large Greek debt write-down.

Copyright AFP (Agence France-Presse), 2010