INTERVIEW: Only Solution To Greek Debt Is Restructuring-Eichengreen
By Frances Robinson
Of DOW JONES NEWSWIRES
BRUSSELS (Dow Jones)--Restructuring of Greece's government debt is inevitable and Europe should start work on a Brady-style plan now to avoid this happening in a disorderly fashion and causing contagion effects, Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, said Thursday.
"Europe should be prepared for the credit event that's coming, it's certain to occur," Eichengreen told Dow Jones Newswires in an interview. "There are two strategies for resolving the Greek debt crisis--one is restructuring, and the other is restructuring."
A year after the European Union put together a bailout package for Greece, heads of state and government are here to discuss a second rescue for the debt-stricken Mediterranean country. This time, euro-zone politicians want holders of Greek government debt to contribute to the package, by using the money they receive from maturing bonds to buy new bonds on roughly the same terms.
Greece's parliament signed off late Tuesday on a new round of budget cuts as rioters took to the streets to protest extreme austerity measures.
Eichengreen said his best guess for a restructuring is in September when Europeans return from the summer break, giving the currency union six weeks to come up with a plan similar to the Brady bonds used to resolve the crisis in Latin American countries in the 1980s--an operation involving current European Central Bank President Jean-Claude Trichet.
Eichengreen called for Trichet to "dust off his notes". He also ruled out a "Vienna-style restructuring" which some EU finance ministers have mooted.
"Restructuring... can either be done with a plan, like the Brady plan... or in a chaotic, uncontrolled fashion," Eichengreen said. "The Vienna model is to try to get the banks to maintain their exposures... but Greece doesn't need more debt, it can't manage the debt it currently has."
"What Greece needs is less debt -- haircuts on the existing bonds."
Banks in France and Germany are sitting on the biggest piles of Greek government debt, with $22.7 billion in German banks and $15 billion in French banks at the end of last year, according to the Bank for International Settlements.
Eichengreen, speaking after a private event hosted by Think Tank Bruegel attended by EU policymakers, said that restructuring would not lead to Greece leaving the euro, or the demise of the currency union.
"I still think it very, very unlikely, for example, that Greece would reintroduce the drachma as part of its debt restructuring and crisis resolution efforts," he said. "Europe has so much invested in the euro economically and politically that it's not going anywhere."
Turning to the role of the ECB, Eichengreen said it needed to change tack in order to allay false concerns about the crisis deepening in other euro-zone countries.
"What the ECB should be doing is ringfencing Ireland and Spain, it should be saying, we won't let the Irish and Spanish bond markets collapse, we won't let their sovereign spreads rise, we'll buy their bonds," he said. "When the crisis passes we'll sell what we've bought and the European taxpayer will have made money."
Eichengreen added Greece's problems are different to Spain and Ireland, which the ECB has so far failed to acknowledge, and that "the Greek banking system will need more capital from the Greek budget or through transfers from other European countries."
"The fact of the matter is their strategy has not worked," he said. "Spain and Ireland are solvent, they'll be able to pay back the debt they've been accumulated... that is clearly not true of Greece, that's why they need different treatment."
He said that once the "crushing debt burden" has been reduced via restructuring, it would be easier for the Greek government to push through privatization and other reforms, and combined with measures such as a mini-Marshall plan, or targeted use of EU structural funds (the subsidies the bloc gives to its poorest regions) it would be possible for the country to return to growth--whereas "there's no plausible scenario under the current strategy where Greece will start growing again soon."
"Europe needs to draw a line under its crisis, having spent a year just making it worse."
