Belgian think tank Bruegel said that a comprehensive approach to the euro debt crisis includes the reduction of sovereign debt, the restructuring of banking sector and the strengthening of growth and competitiveness.
In a policy brief, economist Zsolt Darvas, Bruegel director André Sapir and professor Jean Pisani-Ferry, propose a comprehensive solution to the current European crisis.
They state that the measures taken by the European Union and the financial assistance provided to Greece and Ireland failed to restore calm in markets as ,in early February 2011, spreads on 10-year government bonds issued by Greece, Ireland, Portugal and Spain are all higher than they were in April 2010, before rescue measures started to be implemented.
However, the Greek crisis stands apart from the crises in the other peripheral countries.
In a policy brief, economist Zsolt Darvas, Bruegel director André Sapir and professor Jean Pisani-Ferry, propose a comprehensive solution to the current European crisis.
They state that the measures taken by the European Union and the financial assistance provided to Greece and Ireland failed to restore calm in markets as ,in early February 2011, spreads on 10-year government bonds issued by Greece, Ireland, Portugal and Spain are all higher than they were in April 2010, before rescue measures started to be implemented.
However, the Greek crisis stands apart from the crises in the other peripheral countries.
First, the Greek public debt predicament originates mainly in the mismanagement of public finances.
Second, Greece “is clearly on the verge of insolvency” as the debt-to-GDP ratio is expected to reach 150%.
Furthermore, public debt levels in the other peripheral countries are more manageable (with levels in 2011 remaining below 70, 90 and 110 % of GDP, respectively, in Spain, Portugal and Ireland) than in Greece.
Bruegel commented that it is not only the size of the adjustment effort that matters. The key indicator for assessing solvency is the size of the primary budget surplus that needs to be maintained over a period of years to achieve, in the medium term, a gradual return of the public debt to safe levels.
The numbers for Greece stand apart from those for other countries as even under the optimistic scenario, the primary surplus required to reduce the debt ratio to 60% of GDP in twenty years would be 8.4% of GDP.
It would reach 14.5 per cent of GDP under the cautious scenario. This would imply devoting between one-fifth and one-third of tax revenues to interest payments on the public debt.
The think tank concludes that Greece has become insolvent and that further lending without a significant enough debt reduction is not a viable strategy, while this conclusion does not apply to Ireland which also needs to carry out a major budgetary adjustment but could keep the debt ratio at sustainable level.
Bruegel said that EU’s “wait and see” approach is a dubious strategy. Although clearly desirable, reforms and growth acceleration are hard and time-consuming processes. And the lingering threat of restructuring is likely to be economically and financially damaging for the economy.
Moreover, as official creditors - EU partners and the International Monetary Fund (IMF) - are gradually substituting private creditors to Greece, postponing the restructuring would imply, to keep the debt ratio at sustainable levels, either a restructuring of official loans, or a significantly higher eventual haircut on private claims.
The think tank proposes a comprehensive solution consisting in three planks: a method to reduce the Greek public debt, a plan to restore banking sector soundness and a strategy to foster growth and competitiveness.
Regarding the reducing of the Greek debt, Bruegel stressed that it would be preferable to implement sooner, rather than later, a significant reduction of the Greek debt.
The reduction could be achieved through voluntary exchanges. This justifies giving the European Financial Stability Facility the mission and the financial means to carry out such operations on a significant scale.
The second component consists in the cleaning up of banks, wherever needed and simultaneously throughout the euro area, based on the results of a rigorous stress test given added credibility by the involvement of the IMF.
The third component involves fostering adjustment and growth in peripheral countries not only through budgetary consolidation and competitiveness-enhancing measures in these countries but also through the mobilization and better implementation of EU structural funds.
Source: ANA-MPA
