Proposals by European policymakers to push through a “soft” restructuring of Greek debts have been condemned by leading economists as a politically-motivated bid to delay the inevitable default by the debt-laden country.
Finance ministers from the eurozone have proposed extending the maturities of Greek debts – dubbed by officials as ‘reprofiling’ - just a year after the EU and IMF put together a E110 billion bailout package aimed at drawing a line under Greece’s problems.
The move came as it has emerged that Greece faces a funding gap of up to E80 billion between now and 2013 when the new European Stability Mechanism, set up to coordinate rescues, comes into operation.
Barry Eichengreen, Professor of Economics at the University of California, Berkeley and an acknowledged expert on the euro system, criticized the idea. “In my view, a ‘reprofiling’ that just stretches out the Greek debt without reducing its present value solves nothing,” he told Emerging Markets.
The latest crisis over Greece, which has seen the yields on the country’s two- and 10-year sovereign debt hit new records, comes almost exactly a year after the EU/IMF rescue was agreed. Since then Ireland and Portugal have also had to seek a bailout.
The problems at the heart of the world’s largest economic zone have fuelled fears that one of the peripheral countries might leave the euro and trigger a break-up of the single currency.
Nariman Behravesh, chief economist of IHS Global Insight, a consultancy, said that ‘reprofiling’ was an attempt by politicians to avoid admitting the need for restructuring.
“Eurozone governments are lurching from crisis to crisis rather than dealing with the ultimate problem that will involve the restructuring of Greece and possible Ireland and Spain,” he said.
This week it emerged that the European Central Bank had criticized the maturity extension plan, which were put forward by German finance minister Wolfgang Schauble, saying that it would undermine efforts to ensure that Athens embarked on a radical economic and fiscal reform plan.
ECB Executive Board member Juergen Stark told a conference in Athens on Wednesday that a debt restructuring would have catastrophic consequences for the euro zone.
“For the ECB, according to our statutory obligations, a debt restructuring would undermine the collateral adequacy of Greek government bonds,” Stark said.
“This means that a debt restructuring would make the continuation of large parts of central bank liquidity provision to the banking system of Greece impossible.”
But some leading economists defended the plan. Holger Schmieding, chief economist at German investment bank Berenberg, said it was a “serious proposal, not political verbiage”. “I don’t think they are softening people up for something harsher”.
Schmieding said that the key concern was to avoid contagion to Spain, which at 11% of eurozone GDP is four times the size of Greece. “What you really have to worry about is the potential and real impact on Spain,” he told Emerging Markets.
“Spain - not Greece - is the issue. Whatever we may or may not do to Greece is not worth upsetting the outlook for Spain,” said Schmieding, the former chief European economist at Bank of America-Merrill Lynch.
“If it can be done in way that holders of Spanish bonds would not take fright then it would help – but it’s a very big if.”