MercoPress. South Atlantic News Agency

Top economists anticipate ‘restructuring’ of Greek debt or ‘booting’ out of the Euro

How to address an ‘unsustainable debt’ by Dr. Doom Roubini and Paul Krugman

Nouriel Roubini, the New York University economist known as Dr Doom, says Greek restructuring would not bring down Europe's financial system. The economist, who earned his nickname by predicting the global financial crisis, says an orderly debt restructuring could pre-empt more trouble.

He says on his website that the “dogmatic” opposition to restructuring by European Central Bank (ECB) is the wrong stance and that Greece's debt is “unsustainable”.

Roubini says bondholders could be given new bonds that don't reduce the face value of their holdings but give Greece more time to repay them. He added that would prevent banks that hold the bonds from having to take severe losses.

The ECB argues restructuring would damage banks in Greece and elsewhere and isn't an easy way out of the crisis.

In that same line of thinking one of Germany’s “wise men” said Greece needs creditors to take a haircut of 40% and swap the remainder of its debt for some form of jointly-issued Euro zone bonds as part of an overall package encompassing other struggling states, a German government advisor said.

“One needs a comprehensive concept that decides just how much debt states like Greece, Ireland, Portugal, Spain and Italy can sustainably bear,” said Peter Bofinger, an economist who sits on a five-person advisory panel known as the “wise men”.

“That requires an enormous effort, but it is necessary,” he added, speaking to journalists in Hamburg. Bofinger, generally considered to be a Keynesian, has supported a type of economic rebuilding program akin to the Marshall Plan instituted in Germany after the Second World War.

The German government has said repeatedly that it does not want to go forward with restructuring of Greek debt in the near term although European policymakers continue to discuss some other form of “soft restructuring”.

Otmar Issing a former European central bank chief economist said Greece will probably be unable to meet its obligations since the country is insolvent.

“I’m sceptical about Greece,” said Issing, who joined the ECB a year before the Euro inception in 1999 and stayed there until 2006. “Greece is not just illiquid, it’s insolvent.”

“It’s basically inconceivable that there won’t be some significant losses on present value for bondholders” of Greek, Portuguese and Irish debt, economist Paul Krugman, said at the same press conference in Copenhagen. While “Spain may be able to tough it out,” it’s “extremely” unlikely Greece will be able to honour its debts.

“I would put 50% odds on Greece being booted out of the Euro, not so much through deliberate policy as through contingency of events” Krugman said. The country may face a banking crisis, exacerbated by the ECB refusal to “maintain” loans to the country’s banks, he said. That could lead to a Greek exit from the Euro, he said.

“By any reasonable estimate, the Euro-zone isn’t an optimal currency area” said Krugman. Europe lacks “very high labour mobility,” and “fiscal integration,” which are criteria needed for a joint currency, he said.

According to Issing, who revealed he was “never Euro-phoric” and was among economists in Germany “warning against premature entry into the monetary union and against too many countries,” the currency union can’t be allowed to fail.

“Once it has started, it must not fail,” he said. “It would be a political and economic disaster”.