German Government Advisor Lars Feld Tells Rundschau Greek Default Would Have "Limited" Impact

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An interesting interview in Frankfurter Rundschau with German government advisor Lars Feld shares Germany's latest perspective on Greece, which is, as many expect, that the country at the heart of the Eurozone is merely setting the liquidity framework and backup preparations for the inevitable. To wit: "Restructuring Greece’s debt would cause “limited” reaction in financial markets because they have been expecting a Greek default for some time." Alas, that was the hubris that drove the decision to send Lehman over the cliff. But the world has never learned from history, why should it now? When asked if Greece is broke, Feld cuts to the chase "I fear that Greece has a solvency problem" translation - yes. Not that we needed to get confirmation with 1 Year yields in the mid 100s, mind you. Yet despite recognition of the inevitable, when asked whether Greece will leave the Eurozone, his response: "That would be a disaster - for Greece and for the euro-zone... Greece's economy and its financial system would sink into chaos, at least for a brief period time. And the speculative floodgate against the euro and its member states would open. Those who believe a Greek ouster is possible is at best naive." And therein lies the rub.

Full google-translated interview:

Despite billions in support of Greece is not out of the crisis. Athens this year will fail to meet its obligations, the deficit will be higher than planned. Leaders from the FDP and the CSU are therefore calling for a debate about a bankruptcy in the country. CDU and the opposition have warned that a bankruptcy would lead Greece to the markets to panic. Ultimately, the bankruptcy Athens can not be avoided, however, says the economy Lars field. And it is expensive.

Professor Field is Greece broke?

I fear that Greece has in fact a solvency problem.

How do you say that? Finally, underpinning all aid credits for Athens on the assumption that the country is solvent or at least is.

Greece is insolvent in the sense that its public finances are not sustainable. For two reasons. First, Athens is an extremely tough austerity program imposed. This savings program should be maintained for a further ten years. The government has so for years the population of strict waiver request to finance the interest payments, especially to foreign countries. This is not through politically. Second, the savings program is no alternative, but also chokes off economic growth, which exacerbates the debt situation.

And if the Greek economy is still recovering?

There would need a credible growth strategy. I do not see.

The end of September, the EU will decide on the disbursement of loans to Greece next. She throws good money without a barrel in the ground?

In the current situation could be a non-payment of loans is a major problem and will exacerbate the crisis in Europe. But even if the loans are approved, must decide how Greece's debt can be restructured.

"Restructured" simply means "deleted"?

Yes. The Advisory Council has the following suggestion for this: the Greek debt, which is currently owned by government and private creditors are given the euro rescue EFSF. In return, the creditors will receive safe EFSF bonds - but only half of the nominal value of Greek bonds. Say: Creditors forego half of their claims. EFSF Athens as the main creditor could then put pressure on Greece to reform its economy.

Would not that have a transfer union - the European Central Bank would eventually pay, Greece has purchased the bonds with an estimated 40 to 50 billion €?

The ECB could swap their holdings of Greek government bonds without discount and would be a piece of the EFSF released far from the fiscal responsibility. A transfer union is not, because this action in the matter, is in the amount and limited duration. There is also no transfer flows to Greece, but the creditors will receive AAA-rated bonds EFSF.

With a debt restructuring would be the market's confidence in Greece, then probably for the foreseeable future. How should the country ever again borrow money?

The trust has been destroyed yet. Only Greece is cutting its debt as the debtor again solid.

As waiver of 50 percent likely to survive the Greek banks do not have the money borrowed Athens.

In order to support her, would again provide the EFSF 20 billion euros.

This costs the EFSF much money, around 200 billion euros for the Greek national debt plus 20 billion for the banks. Then there are the loans already promised to Ireland and Portugal around 44 billion euros. Then there would be no more money left over, if the crisis in Spain and Italy on handles.

For such a case would actually be available only transitional assistance for these countries. Originally, the EFSF be put through its increase in the level of being able to capture even Spain. That would not do anymore. And Italy is too large for the EFSF.

A bankruptcy of Greece would probably stir up panic in the markets. Are not you worried that the crisis spreads to other countries?

An infection of Ireland or Portugal would be no problem. Both countries are funded for the foreseeable future over the EFSF and do not need money from the financial markets. The banks of both countries are not heavily involved in Greece, for it would be a waiver therefore bearable.

The major risk factor but are Spain and Italy. Here threatening infection. This was demonstrated in the past week. As a leading FDP politicians have speculated about a bankruptcy in Greece, the interest in these countries turned up. Italy had to pay investors 5.6 percent interest, two months earlier it was only 4.9 percent.

I think the markets expect long with a bankruptcy Athens. Enters it, the market reaction would probably be limited.

And if not? The crisis is spreading to Italy from the euro rescue package would be too small EFSF - after Italy takes over the next three years about 500 billion euros in loans.

Especially Italy and Spain would then hang up credible consolidation strategy and indicate the financial markets so that they address the problem.

What happens if these countries are indeed up plans, but the markets can not find it credible?

Then there are three possibilities. In some, the European Central Bank buys Italian and Spanish bonds and supports so the market. Or the euro rescue EFSF buys the bonds, but what he would have to be enlarged again. The best thing would be to turn the EFSF a banking institution. Thus, the bailout could then borrow money from the ECB and would have enough firepower. In contrast to the ECB may make regulations EFSF the country.

Greece should not simply leave the euro zone?

That would be a disaster - for Greece and for the euro-zone. The average debt in this case, cheating is not 50 but 80 to 90 percent. Greece's economy and its financial system would sink into chaos, at least for a time. And the speculation against the euro and its Member States would open the floodgates. Who keeps an outlet of Greece for the solution that is at best naive.

Interview by Stephan Kaufmann.