Greece should consider insolvency if cannot pay debt: German central banker

(VIENNA) - Greece should be prepared to declare itself insolvent if it cannot repay its debts, a director of the German central bank said in remarks published Friday, signalling a hard line against help for heavily indebted EU countries.

Bundesbank board member Thilo Sarrazin said that if Greece were unable to finance its debts, "it will have to do what all the indebted do, declare itself insolvent ... that would be the best warning example for other potentially weak states" in Europe.

In his remarks to the Salzburger Nachrichten daily, Sarrazin did not name which countries he considered to be weak but did say that "The Netherlands, Germany, Austria, Belgium and Luxembourg will not have this type of problem because we have a different mentality."

Sarrazin is one of six board members at the Bundesbank, whose head in turn sits on the governing council of the European Central Bank. The ECB controls monetary policy for the 16-nation eurozone.

He said that if financial aid for Greece from the European Union was "the only protection against the unsound financial policies of some countries and if they get into massive rampant debt, then we will have a risk of unforeseeable consequences."

Critics of proposals to bail out Greece, labouring under huge budget and debt deficits, say that to do so would only encourage weak eurozone members to rely on the EU to fix their problems, letting their governments pass the buck on the stiff measures they themselves should take.

Sarrazin noted that in the past, France, Italy and Spain had had a tendency of wanting to deal with their debt problems by allowing higher rates of inflation, which reduces the real value of the money owed but also threatens savings and the health of the wider economy.

In morning trade, the euro was lower against the dollar, continuing a trend of the last few weeks as the crisis over Greece, and in turn the eurozone, has deepened.

Sarrazin said the situation in Greece "raises absolutely no immediate danger for the euro."

Sarrazin's remarks appeared directed at a warning from Greece that if it does not get financial help in some form from the European Union, it might have to ask the International Monetary Fund for help.

In the next few weeks, Greece must raise about 20 billion euros (28 billion dollars) to redeem old debt falling due but given its weakness, the markets will only provide the money at very high rates of interest.

Greece it having to pay well above 6.0 percent to borrow money, a rate which Athens considers unbearably high and unsustainable.

Under pressure from the EU, the Greek government has announced draconian action to restore its public finances to health but they have met major public opposition.

The line taken so far by the EU, and particularly Germany, is that Greece must bear the costs of its own policy errors and that strong corrective action will in time win it back credibility on financial markets.