EU: Greek default ‘not an option’

The European Union said Greece will not be allowed to default because of the weak state of the region's banking system.

Olli Rehn, the economic and monetary affairs commissioner at the EU, said the 'fragilities' of Europe's banking system mean it could not withstand a default by Greece, Bloomberg reports.

European banks had $188bn at risk from exposure to Greek, Irish , Portuguese and Spanish government debt at the end of 2010, according to a report by the Bank for International Settlements (BIS).

Lenders in Europe also held around $52bn in Greek sovereign debt, with German banks holding the biggest share, BIS said.

Rehn said as a result of countries' exposure to Greece, it will not be allowed to default, because of the impact it would have on other regions.

The comments from Rehn contrast with ratings agency Moody's which said at the beginning of June there was a 50% chance of a Greek default.

Meanwhile, officials in Europe are coming up with a new package for Greece, following the IMF's approval of the fifth round of the country's $110bn bailout last week.

Europe has also been mulling how to let private investors buy in to Greece without spurring a default.

Rehn said one option being considered is to get investors to reinvest in new debt after existing bonds have matured.