By Steve Goldstein
WASHINGTON (MarketWatch) — The former number-two official of the European Central Bank opposes forcing holders of Greek national debt to accept reduced interest or principal, saying on Friday that such a move won’t address any of the key issues facing the struggling euro-zone nation.
Lucas Papademos, the former vice president of the European Central Bank and governor of the Bank of Greece, said that Greece instead needs to focus on improving tax collection, commit to fiscal discipline over the long term, achieve an “ambitious but feasible” privatization program and improve competitiveness, such as by taming its bureaucracy, trimming regulation and streamlining the legal system.
Even after receiving 110 billion euros ($159 billion) of loans from the International Monetary Fund and the European Union, Greek debt is still perceived to be the riskiest in Europe and one of the riskiest in the world, which has led to growing calls for a restructuring of its debt. Greek five-year credit-default swaps trade over 9 percentage points higher than the equivalent German swaps.
Papademos, speaking in Washington at the first of a “European Economic Crisis Seminar Series” sponsored by the Center for Strategic International Studies as well as Greece’s Embassy, did say the 250 billion euro European Financial Stability Facility should have the ability to intervene in the secondary market to buy sovereign debt. European leaders are due to discuss the EFSF in June.
The former central banker pointed out that the high yields on Greek debt doesn’t only constrain the government but also banks and private-sector companies.
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“I’m not saying there’s no reason behind the pressure, but they are a source of instability,” said Papademos, who’s now a visiting professor at Harvard as well as professor of economics at the University of Athens.
But he also said Greece does have the ability to escape the need for a default. “Such a scenario need not materialize,” he said. “The key to success is implementation,” which he said could spur growth in the medium to longer term.
He said the problems of Greece as well as Ireland and Portugal — which this week became the third euro-zone nation to apply for international assistance — all were caused by some combination of rising debt, an erosion of cost competitiveness and a property boom fueled by low interest rates and inflation.
“No matter how you look at this, this crisis is global,” Vassilis Kaskarelis, the Greek ambassador to U.S., said in introductory remarks.
Steve Goldstein is MarketWatch’s Washington bureau chief.