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22nd Feb 2020

German economist: Greece should default now

  • The first aid package for Greece is not proving sufficient (Photo: jay bergsen)

Letting Greece default now rather than in a year's time would be cheaper and would help the country more than a second aid package currently under discussion, a German economist and former official with the European Central Bank (ECB) has said.

"There is a consensus now in the German economic academic community that a haircut or a partial default in Greece is necessary," Ferdinand Fichtner, an economist with the German Institute for Science (DIW) and a former ECB official told a group of Brussels-based journalists in Berlin on Wednesday (12 May).

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In his view, prolonging Grecee's agony by another year would only make the inevitable haircut more expensive, as "private creditors will be more and more replaced by public ones, meaning the ECB."

"In the end, it will be more expensive for the public sector rather than the private one if politicians don't react quickly and agree on a haircut sooner rather than later," he argued.

But he admitted that among German policy makers - perhaps with the exception of finance minister Wolfgang Schauble - and ECB officials there is no consensus on letting Greece default.

One explanation, in Fichtner's view, is that the ECB has at least €50 billion of Greek government debt on its books, while Germany 'only' holds around €20 billion.

As for the outgoing ECB chief Jean-Claude Trichet, whose term ends in October, he should "admit that it was a mistake to insist that Greece would not default," rather than leave it to his successor, most likely Mario Draghi.

"We need default regulations and insolvency rules for euro area countries, otherwise we will run into the same problems in the future," he added, echoing calls from Schauble made one year ago that the euro-area needs clear rules for what he called "orderly debt restructuring."

On Thursday, Schauble reassured members of the German legislature that Portugal will not become as bad as Greece.

He also suggested that Greece may need a second aid package - the first time the German government has talked openly about what has only been rumoured in the past weeks.

"We will not be able to agree to further measures without clear conditions," he said, insisting that Greece will have to do more.

An eagerly awaited report by the ECB, the IMF and the European Commission is expected to give clarity in June if the Greek government has been unable to deliver on its austerity commitments or if the conditions were simply too hard to meet and the spiral of austerity, low tax collection and lack of economic growth impossible to escape from.

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