The European Central Bank said the threat of the Greek debt crisis spilling over into the banking sector is the biggest risk to the region’s financial stability. “Greece could have a contagion effect,” ECB Vice President Vitor Constancio said at a briefing in Frankfurt today, when presenting the bank’s semi-annual Financial Stability Review. “That’s the reason why we are against any sort of default with haircuts and any form of private-sector event that could lead to a credit event or a rating event.” The euro area’s sovereign-debt woes have worsened as investors increased bets that Greece will not be able to pay its debts, sparking the region’s first sovereign default. The risk that euro-area banks holding Greek government bonds will be saddled with losses has jumped, after Standard & Poor’s slapped Greece with the world’s lowest credit rating on June 13. "The euro area faces a very challenging situation that comes mostly from the interconnection of the sovereign debt crisis and the situation of the banking sector,’’ the ECB said in the review. “In light of the potentially very dangerous implications of sovereign-debt restructuring for the debtor country, including its banking system, a determined and unwavering focus on improving fundamentals” is required. Vienna Initiative
The ECB and the German government have clashed over how much investors should contribute to alleviating Greece's debt load, which reached 143 percent of gross domestic product in 2010. While the German government has argued for an extension of the maturities of Greek bonds, the ECB has said it’s against anything that could be interpreted as a default.
Constancio reiterated that the ECB is in favor of a plan for bondholders to agree to roll over their debt voluntarily. The approach is modeled on the Vienna initiative, where banks agreed to roll over loans to units in Eastern Europe at the height of the financial crisis in 2009. “We are not against all forms of private-sector involvement,” he said. “Some sort of Vienna style initiative could be conceived. It’s not for us to provide solutions.” While Ireland and Portugal were also forced to ask for external help over the past year, the ECB said there are“encouraging” signs the crisis has been contained.
