Future ECB chief: Greek default too costly

• Credit rating cut to lowest of any sovereign worldwide
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Mario Draghi, the likely next head of the European Central Bank, on Tuesday stuck to the bank's hard line against letting Greece default on its borrowings as a solution to its crushing debt crisis.

Greece, which was already granted a €110 billion (US$158 billion) bailout last May, needs tens of billion of euros in additional financing over the coming years as it remains locked out of international debt markets.

The question is whether to get private-sector investors to share the burden, and if so, how to do that without disrupting Europe's financial system.

Draghi said at a European Parliament hearing on his nomination that he opposes any move by Greece to not fully repay investors what they are owed, which would be considered a default by ratings agencies.

Greece was selling €1.25 billion (US$1.79 billion) worth of Treasury bills Tuesday, a day after it suffered another humiliating credit rating cut over fears private investors will be called on to share the burden of a potential Greek restructuring.

The 26-week auction comes as markets assess the impact of Standard and Poor's decision to slash the debt-ridden country's rating from B to CCC.

Greece now has the lowest rating of any sovereign in the world.

The agency warned of the likelihood of one or more defaults as the country grapples to meet its financing requirements.

It said that delaying Greece's debt repayments - a move proposed by Germany to get private investors to take on some of the bailout burden and give the country more time to reform its economy - would be considered a default.

Draghi said "the cost of a default would likely exceed its benefits".

European finance ministers are trying to work out some kind of solution at a meeting Tuesday evening in Brussels, ahead of a European Union summit later this month, with Germany and some other states proposing that private investors accept delayed repayment on Greek bonds.

But the ECB has repeatedly rejected any such suggestion. And Draghi, who will replace current ECB head Jean-Claude Trichet when his term expires October 31, repeated Trichet's position word for word.

Any money saved by Athens not paying the full amount on government bonds would simply be spent bailing out Greek banks who would suffer losses on their holdings of such bonds, Draghi said at a hearing of the European Parliament's economic and monetary affairs committee on his nomination.

"As a haircut is implemented they are going to have a capital loss, and often, probably, their capital would be completely wiped out," Draghi said. "So more money would be needed."

He also pointed out that Greece is still running a budget deficit and has to get credit from somewhere, so that anyone advocating restructuring would have to be prepared to come up with more aid.

"All in all, the costs seem to outweigh the benefits," he said.

European finance officials are struggling to find a way to keep Greece from defaulting on its debts. The €110 billion ($160 billion) rescue loans granted by other Eurozone countries and the International Monetary Fund has failed to solve the country's problems.

A deep recession has left it unable to balance its budget despite cutting spending and raising taxes, and it remains unable to borrow by selling bonds.

Germany has said any new financing should include a contribution by bondholders, proposing they accept new bonds that mature seven years later to help give Greece more time to fix its problems. That has left the Eurozone's largest country - and main funder of its bailouts - at odds with the central bank.

Dutch finance minister Jan Kees de Jager backed up the German position, saying his government would aim to have private investors contribute more than 30 per cent of the new aid package.

He declined to specify how that would occur.

- AP