The Inevitable 'Hair Cut' In Europe - An Interview With Dr VK Tsitsiringos, Part 2
The Inevitable 'Hair Cut' In Europe - An Interview With Dr VK Tsitsiringos
, Part 2
This article, is the second in the series on the European Debt crisis and its impact on Europe with Dr V. K. Tsitsiringos. lets start with a question on the possible solutions.
KP: And are these political solutions then?
Dr.VKT: It is very understandable that politicians do not favor any of these solutions. The adverse reaction is inviolable. The governments are afraid they will lose their credibility in financial markets. In the case of bonds held by foreign agencies, particularly foreign banks, the remission will lead to the destabilization of other countries. These objections are perfectly legitimate, but it is not possible due to justifiable objections to find a result in unreasonable conclusions. The only options offered are our internal and external depreciation. European leaders must choose which one to adopt, and do so unanimously to exclude external depreciation. Note that internal devaluation requires restructuring the debt. The refusal of the restructuring is unwarranted and illogical.
KP: And is there a substitute to debt?
Dr.VKT: The basic mechanisms of debt restructuring are known. Governments can offer new bonds to replace the old with lower face value. You may be able to choose the bondholders, that is, to choose between bonds with a nominal value of the same bonds that hold today with a longer maturity and lower interest rates, bonds or shorter term and higher interest rates but with a value that is only a fraction of nominal value of current counterparts. This is not rocket science, and all this they have done before. Yet to go all well, three conditions are necessary.
KP: These are?
Dr.VKT: First, the bond holders must be sure that new bonds will be safe. We must therefore provide appropriate safeguards. As seen was the debt restructuring in Latin America in the 1980 under the Brady Plan, these sweeteners were provided by the U.S. Treasury. This time that role must take the International Monetary Fund and the German government. Second, countries must move together. Otherwise the debt restructuring of a country will reinforce expectations that others will follow, strengthening the 'contamination' of the Eurozone. Finally, the banks as a consequence of these changes will be required to take losses, at the same time they will be the need to strengthen their capital base. It takes real 'endurance test' to the European banks, rather than surface chance expectations as the tests conducted last summer.
KP: This is very compelling information. Can you go further about the banks?
Dr.VKT: In banks where the realistic scenarios of a debt restructuring would suggest big holes in their capital base they should be converting debt into shares. For those banks is not enough even this will require immediate capital injections from their governments.
KP: Dr.T, can you put all this together?
Dr.VKT: Obviously, we see how to work this whole thing would require European countries to move together. And once you have some strengthened bank balance sheets, more can be done to restructure mortgages, bank debt and other debts of the private sector without necessarily come all at destabilizing the financial system.
KP: Do you have any other thoughts on this subject?
Dr.VKT: Yes I do. I must say that now we must pass the difficult part. This requires a determined leadership. The leaders of Germany should recognize that the country's banks are dangerously exposed to the debts of the region of the Eurozone. The German people must be convinced that the use of public money to provide "sweeteners" to the bitter pill of restructuring and rehabilitation of the capital base of banks is crucial to the strategy of internal devaluation. In short, Berlin insists that we must follow partners in the region of the Eurozone. Therefore, European leaders - first and foremost the political leadership of Germany - should make clear that the alternative is too bad to think about. Because it really is!
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The Inevitable 'Hair Cut' In Europe - An Interview With Dr VK Tsitsiringos, Part 2