As Greece’s largest bond holder, with a portfolio worth perhaps €40bn, the European Central Bank is watching closely the tense and protracted negotiations over losses private investors would accept voluntarily as part of a second refinancing deal for the country. Mario Draghi, ECB president, will discuss progress when eurozone finance ministers gather tonight (Monday) in Brussels.
The ECB has two objectives: first, to secure a deal that has a reasonable chance of working and, second, to avoid bearing any burden itself. Neither will be easy.
Fiscal woes are here to stay. Decades of discipline on public finances will be needed to bring eurozone public sector debt back within the European Union’s rules, the European Central Bank has warned.
As if determined to keep up the pressure on governments, the ECB latest monthly bulletin sets out scenarios for the debt-to-GDP ratio, according to appetites for cutting spending and/or raising taxes. Only on the boldest scenario, in which the “primary balance” (excluding interest payments) improves by one percentage point of GDP a year until 2018, does the ratio return below the 60 per cent limit within two decades. If no consolidation efforts are made, the ratio rises from 84 per cent this year to 150 per cent by 2026. Its assumptions may prove wrong, the ECB concludes, but the results “illustrate the increased risks to fiscal sustainability in the euro area”.
Gloomy stuff, but there could be some quick wins.