A Greek debt restructuring would have a destructive impact, not just in that country, but across the eurozone and in Germany in particular, according to Italian ECB member Lorenzo Bini Smaghi.The result of a Greek debt restructuring would be the collapse of Greece’s banking system, according to Smaghi, speaking to Italian paper La Stampa. That’s because many of the bank’s high quality securities would no longer be able to act as collateral when dealing with the ECB. Further, Smaghi says because Greece doesn’t control its own central bank, it will have no access to the funds necessary to pay for its spending, including government salaries and pensions. Smaghi describes this event as, “a true economic meltdown.”
Smaghi blames Greece’s consideration of a debt restructuring on “investment banks and law firms in search of comissions,” who have ignored the bad things that would happen as a result.
Smaghi also warns of the impact of a restructuring on German banks which remain exposed to Greek debt.
His comments fall in line with the ECB position, which is strongly against a restructuring. Some sort of soft restructuring, coupled with another bailout, seems the more likely solution, even if domestic German opinion is opposed to any more spending.