ECB says Greek bond purchase plan plausible

The European Central Bank's German chief economist said Wednesday that a proposal for an EU rescue fund to buy Greek bonds might work but that markets would likely still feel Athens had defaulted on its debt.

ECB says Greek bond purchase plan plausible
Photo: DPA

Jürgen Stark told the financial daily Börsen-Zeitung in comments to appear Thursday that he “personally sees no risk of a credit event, or credit downgrade,” if the European Financial Stability Facility (EFSF) bought Greek sovereign bonds on secondary markets.

A “credit event” would trigger the payment of insurance on sovereign bonds known as credit default swaps, meaning that markets considered Athens to have defaulted on some of its €350 billion ($500 billion) in debt.

Stark allowed however that market participants could well conclude a default had taken place if the EFSF bought Greek bonds, one idea that has been floated to reduce the pile of debt that many feel will never be fully repaid.

His comments were released a day before a summit in Brussels called to find ways of dealing with the Greek debt crisis, which threatens to spill over into the much larger eurozone economies of Italy and Spain.

French President Nicolas Sarkozy and German Chancellor Angela Merkel were to meet later Wednesday in Berlin ahead of the summit to discuss possible remedies.

The ECB has warned repeatedly that a declaration of default would mean it could not accept Greek bonds as collateral against loans, which would likely cause the Greek banking sector – and perhaps others – to collapse.

ECB officials have urged eurozone political leaders to reinforce the EFSF and make it more “flexible,” meaning making it able to take over the ECB’s unwanted role of buyer of last resort for Greek bonds.

Deutsche Bank economist Gilles Moec noted that the EFSF could raise money to lend to Athens to buy back its own bonds at discounted prices and cancel them, thus reducing its debt load somewhat.

Moec said that that “can hardly be a silver bullet, as bond prices are likely to rise sharply in response to such an announcement, but that would be a sign that the Europeans are taking the long term debt sustainability issue seriously.”

The economist warned however that substantially increasing the EFSF’s size to deal with other problems “would be a mistake, as it could jeopardize the AAA (ratings) status of some of the core countries, France in particular, which in term would entail a complete collapse of the rescue system.”


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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.