Monday, May 30, 2011

Orderly Greek restructuring a ‘fairytale’

Financial Times
May 29, 2011

The European Central Bank has clashed angrily with eurozone politicians over the handling of the Greek crisis. But for Lorenzo Bini Smaghi, executive board member, it is vital that the euro’s monetary guardian puts its case as forcefully as possible.

Talk about Greece reneging on debt commitments “has been very damaging” and suggests “that investing in the euro area is unsafe,” he warns. Even for a country that flouted eurozone fiscal rules for a decade, “a debt restructuring, or exiting the euro, would be like the death penalty – which we have abolished in the European Union”, he says.

Across the eurozone and beyond “the destabilising effect could be dramatic”, he says in an interview with the Financial Times. Economists who imagine the impact would be containable are like “those who in mid-September 2008 were saying the markets had been fully prepared for the failure of Lehman Brothers”.

The ECB’s position was challenged last week by Germany’s Otmar Issing, the bank’s chief economist until 2006, who warned that Greece was insolvent and unlikely ever to repay its debts. But Mr Bini Smaghi a former Italian finance official who has an economics PhD from the University of Chicago, insists he is wrong.

“[The Greeks] have assets they can sell and reduce their debt and they have the instruments to change their tax and expenditure systems to reduce the debt . . . Poor developing countries have no assets, their income is low, and so they become insolvent easily. If you look at the balance sheet of Greece, it is not insolvent.”


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