FRANKFURT (Reuters) - Austria’s central bank chief said a Greek rescue deal could involve a short-term default without disastrous consequences but, in a rapid about-turn, later insisted on Tuesday that he shared the ECB view on Greece.
Ewald Nowotny’s sudden change of position hinted that cracks were appearing in the European Central Bank’s stance on Greece but that ECB President Jean-Claude Trichet — with just three months left in office — is still guiding the bank’s position.
A shift in the ECB’s resistance to a ‘selective default’ could facilitate agreement on a new Greece deal at Thursday’s European Union summit — something officials privately say is needed to calm markets and prevent the debt crisis intensifying.
Nowotny told CNBC that a full default would have “grave consequences” for Greece and the ECB’s ability to accept its debt as collateral, but — apparently breaking ranks with the ECB line — he also indicated that selective default might work.
“There is ... a full range of options and definitions — from a clear-cut default to selective default, to a credit event and so on,” he said.
“This indeed has to be studied in a very serious way,” he added. “There are some proposals that deal with a very short-lived selective default situation that would not really have major negative consequences.”
However, Nowotny’s spokesman later said in a statement that he “stands in complete agreement with the position of Jean-Claude Trichet and the ECB.”
Trichet’s line after the ECB’s monetary policy meeting earlier this month was: “We say no to selective default, no to a credit event.” He repeated that view in a newspaper interview published on Tuesday.
Nowotny’s about-turn was reminiscent of an episode last month, when the ECB issued a new version of comments made by the bank’s vice president, Vitor Constancio, on a Greek rescue plan.
The ECB has proved a major stumbling block to agreeing a second bailout for Greece, saying it would refuse to accept Greek bonds as collateral in its lending operations in the event of a default or a selective default.
Analysts wondered whether Nowotny’s comments were a sign of opposition on the issue to Mr Trichet, who will be replaced by Italy’s Mario Draghi later this year.
“I think he (Nowotny) is probably not alone in his views — there is a debate on the (Governing) Council,” Citigroup economist Juergen Michels said of Nowotny’s initial comments.
“At a time when the porte-parole of the ECB, Mr Trichet, has a very clear stance on this ... the situation seems not as clear as he presents it,” he added.
Lorenzo Bini Smaghi, a member of the ECB’s Executive Board, also blurred its line at the weekend, saying that allowing the EFSF bailout mechanism to buy bonds on the secondary market would help deal with the crisis.
Such a scenario would likely trigger a selective default — just the scenario Trichet wants to avoid.
Highlighting the seriousness of the situation, former ECB chief economist Otmar Issing told Germany’s Frankfurter Allgemeine Zeitung daily that “a massive haircut is unavoidable” for Greece.
Issing, who remains an influential figure in euro zone policy circles, added, however: “If Greece were to stay in the currency union after that and can count on further help and refinancing from the ECB, that will be the beginning of the end of the currency union.”
The ECB requires that banks put up adequate collateral to receive funds at its regular refinancing operations, upon which Greek banks are utterly reliant for liquidity.
The ECB’s insistence that it would not accept collateral that is in default is aimed at making sure euro zone governments — with or without the private sector — assume the cost of dealing with the crisis, rather than pushing it over to the ECB, which fears its independence being compromised.
In the high-stakes standoff over the Greek crisis, the collateral card is the closest the ECB has to an ace: refusing to accept Greek sovereign bonds as collateral would deprive Greek banks of the funds on which they rely, crippling the Greek economy and risking contagion to other euro zone economies.
Ratings agencies have said that proposals to roll over Greek bonds into longer maturities would be a default and banking and government officials have struggled to find an alternative.
Despite government officials’ inability to find a solution to the Greek debt conundrum, ECB policymakers led by Trichet and Bundesbank chief Jens Weidmann have stuck to their firm line.
There is a chance that Draghi may be more flexible. He has given no signal of taking a different tack to Trichet but has a reputation as a savvy political operator and deal-maker.
Nowotny said it was ultimately up to the ECB — not ratings agencies — to decide what it could accept as collateral.
“At the end of the day, it has to be the decision of the ECB,” he told CNBC. “The ECB should not be totally dependent on rating agencies. It is at the end of the day our own responsibility, our own decision.”
Editing by Mike Peacock/Patrick Graham