VALLETTA (MNI) – There is no risk of an immediate Greek default, but a solution must be found urgently to avert severe contagion risks that could spread well beyond the Eurozone, European Central Bank Governing Council member Michael Bonello told Market News International on Thursday.

Bonello expressed confidence that the Eurogroup would come up with a solution, but once again stressed that no additional demands must be placed on the ECB. Instead, governments must recognize that this problem transcends national interests and must provide a convincing backstop.

“It seems that the IMF would pay out the next tranche [of the Greek bailout package] if a new adjustment programme and its financing are agreed soon, making an immediate event unlikely. And I think they are giving the Eurogroup until the end of July,” Bonello said.

“If the IMF is prepared to wait, also in view of the difficulties the Greek government now has, I think it is probably a good idea to ease the pressure and give it some more time,” he argued.

Nevertheless, a solution must be found urgently, he said. “Given that the stakes are very high, not only for Greece and the euro area but indeed because of the possible systemic repercussions through contagion, I think it is of the essence that a solution be found to restore confidence in EMU as soon as possible.”

“There is no easy answer. That is very clear,” he conceded. “And yet, I do not believe that it is beyond the collective ingenuity of the Eurogroup to devise a solution that would minimize as much as possible the risk of a default while at the same time securing the financing necessary to allow an adjustment program to be implemented by the Greek government.”

“I think it is a pity that it is proving so difficult to acknowledge that there is a superior interest involved here which transcends other, possibly national, interests,” Bonello said. In fact, a failure to resolve Greek troubles runs against all national interests, he argued.

“The important thing to bear in mind is that there is much at stake and everybody has an interest in ensuring that the situation is resolved with the least fallout possible. So I think everyone has an interest in devising a solution,” Bonello said.

He dismissed the analysis of the ECB’s latest Financial Stability Review, released Wednesday, which assessed that contagion risks had declined, saying that this conclusion “is an effect of the cut-off day” of the report.

“The contagion risk is present, there is no doubt about it,” Bonello warned.

Any default “would cause damage not just in Greece, it would possibly have implications for other banking systems and in the end it would be the taxpayers in other countries too that would be hit,” he said. The fallout could be of “potentially broad geographical scope” and “apart from impacting the financial system, could have lasting effects on the recovery.”

“So, really that is why it is so important to go the extra mile and try and find a solution that does not involve a credit event. In the meantime, the ECB has to apply its rules as regards who we lend to and also the collateral that we can accept,” he asserted.

Bonello repeated that the ECB stands firm by its position that any private sector involvement in a Greek deal must be “purely voluntary and that it should not include any element of compulsion.”

He went a step further and said that the ECB would not even participate in any rollover of Greek debt, should there be private sector involvement deal deemed voluntary.

“At the moment we have to stand by our position. Our preference is not to get there, we hope that a solution will be found that does not go this further step towards a default,” he said. Given the recent comments by rating agencies, even a deal that may look voluntary at first sight may result in a credit or rating event, he warned.

The ECB has already gone far beyond its call of duty, Bonello said. “I would say that the Governing Council has exercised its mandate very flexibly, some people might say too much so. But we have to draw the line somewhere and emphasize that monetary policy is not designed to address the kind of market situation, market tensions that are prevailing today.” “Because the ECB seemed to do its job so well, there were expectations that the ECB could do more, including in areas that would exceed its remit,” Bonello said. These expectations to do more are “interpreted as political pressure on our independence,” he said. Bonello expressed disappointment in government action during the crisis and suggested that in some instances the central bank had been coaxed into additional support by political promises that failed to materialize. In particular, he pointed to the ECB’s decision to embark on government bond purchases.

The ECB decided to go ahead with the program only after taking note of governments’ commitment to “take all measures to meet fiscal targets this year and the years ahead.” The ECB went ahead, relying on progress on the fiscal front and exposing its balance sheet to “signifiant risks.” However, “the political commitment has not been followed through sufficiently, and this is why markets are still very suspicious as to the eventual outcome,” he noted.

However, “effective counter-measures can only be taken by governments,” Bonello asserted. “The important thing is that there is a reliable backstop to shore up the position of a country like Greece.”

He said that Governing Council member Nout Wellink’s proposal to double the size of the EFSF bailout fund may be one option to create such a back-stop. “If you have a sufficiently large facility, there would be less anxiety about a possible outcome of the resolution of an individual country crisis,” Bonello said. “It is one possibility; there may be others,” he said. Still, the governor left the door open for some central bank support for Greek banks — although not from the ECB — should there be a default of the sovereign debt.

Asked whether Greek banks could expect to receive Emergency Liquidity Assistance (ELA) via the Greek central bank in case Greek paper were taken off the ECB’s eligible collateral list, Bonello said that national central banks could provide liquidity “in very clearly defined conditions.”

“That is when banks are deemed to be temporarily illiquid but still solvent, so that is the rule,” he said. Asked if Greek banks would be deemed “illiquid but solvent” after a sovereign default, he said that this “is a judgement that the central bank of Greece must make.”

“They are much better positioned to assess the solvency situation. But initially, any way, the problem in Greece, unlike in some other countries, the primary problem was not in the banking system,” he ventured. In any case, “it is not the Eurosystem, however, that decides whether a bank receives such assistance, it is rather the national central bank of the country concerned,” Bonello said.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com