Deutsche Bank CEO doubts Greece can repay debt: report | ReutersAckermann, one of Europe's top bankers who has helped to put together a private-sector bailout package for Greece, questioned the country's ability to turn itself around, according to excerpts of a transcript for the Maybrit Illner talkshow set to be broadcast on German television ZDF on Thursday evening...
Thanks to a $1 trillion rescue package assembled to stabilize the euro, Ackermann believes Italy and Spain will be "strong enough, to service their debt," limiting the probability of so-called contagion but added that in the case of Portugal things are more "difficult."
As often is the case during austerity programs, the initial hit to economic growth is sharper than projected. As a result, tax revenues lag. To the extent that there are some countercyclical spending measures e.g., unemployment insurance, those expenditures increase. As a result, additional deficit reduction is often required, otherwise a country's debt burden relative to its economy reaches even higher levels than anticipated.
During the development of the EU/IMF-Greece rescue package, IMF staffers were concerned about such an outcome. In fact, the IMF offered an alternative preemptive restructuring option that was turned down by both Greece and the EU. Greece wanted to avoid any stigma associated with what could be seen as a forced partial default. The EU wanted its banks to be held harmless from any reduction of debt that would be made under such an arrangement. In fact, the article goes on to note, "Europe must intensify efforts to turn around Greece's financial situation to avoid a need to restructure its debt, since this would impact German banks, Ackermann told the show."
Ultimately, the EU/IMF package addresses the immediate liquidity crisis that had been confronting Greece. Greece must take the difficult measures necessary to address its longer-term solvency issues. It remains an open question on that front.
If Greece is unsuccessful in its fiscal consolidation efforts, then the IMF will likely reintroduce the preemptive debt restructuring option. Failure to do that might lead Greece to default on its own. Under either a preemptive restructuring, which would likely reduce Greek debt by a smaller share than a Greek debt default (perhaps 15%-25% vs. 40% or more under a sovereign debt default), the EU's governments would do well to bailing out the banks that made the bad loans, except if a systemic financial risk were involved. Then, any bailouts should be limited strictly to what would be required to avoid a systemic collapse of the financial system.
Under a preemptive debt restructuring, there should be no systemic risk, except if other states also moved toward default. Such a scenario is not implausible given the historic experience during which sovereign debt defaults have often come in clusters, but if Spain, Portugal, Italy, among others pursue credible fiscal consolidation programs, the risk of multiple defaults could be limited.