European Central Bank Governing Council member Athanasios Orphanides called on European leaders to reverse their decision to have private holders of Greek sovereign bonds take losses, arguing that the Eurozone as a whole would benefit from such a reversal of policy.
In a piece that ran on the Financial Times’ website late Thursday, Orphanides, who heads the central bank of Cyprus, wrote that, “reversing the Greek PSI decision would help to restore trust.”
He said the decision of EU leaders to force losses on private creditors, both in Greece and generally, was largely to blame for the subsequent blowout of spreads in other Eurozone countries.
Private bankers are currently negotiating with officials in Athens on a plan that would cut the nominal value of about 205 billion euros in privately-held Greek bonds by 50%. While some reports have suggested the deal is approaching a conclusion, others have cited the recalcitrance of some creditors to participate – particularly those who are holding credit default swaps against their Greek bonds and would therefore have an incentive to provoke a default in order to get their money back in full.
Orphanides conceded that reversing the Greek PSI decision would lead to higher financing costs for Athens. However, “by restoring trust in the Eurozone, it would reduce the financing cost of other Eurozone governments,” he wrote. “The key is to restore trust.”
The central banker also said that a 30-year low-interest loan to the Greek government, in addition to reversing Greek PSI, could help prevent Greece’s borrowing costs from rising to unsustainable heights.