Former ECB chief economist Otmar Issing recently spoke to German weekly Stern in an interview now published online. His view is that the appropriate strategy for dealing with Greece is to force a hard restructuring and a large writedown of principle greater than 50% and allow Greece to exit the euro zone. Issing wants to prevent the moral hazard of indebted countries from free riding in the euro zone and making the euro a weak currency.
Below is my translation of his commentary:
Former European Central Bank chief economist Otmar Issing has called for a cut in Greek debt and believes that, in the wake of such a cut, an exit by Greece from the euro zone is inevitable. In an interview with Stern the longtime central banker said he considered it "impossible" for Greece to get back on its feet through radical austerity measures. The country would reach a debt ratio of 160 percent of gross domestic product in the coming year. "The country can simply no longer afford the debt service for this horrendous burden," Issing said.
In addition to the former ECB economist, a number of other economists are calling for a debt haircut. Ten experts called for a restructuring in “Financial Times Deutschland”. In a guest article for stern.de director of Hamburg’s World Economic Institute (HHWI) Thomas Straubhaar also called for one and called on politicians to set the procedural conditions that would allow a Euro-area country to go bankrupt.
The renowned economics professor concluded: "Without a serious cut in debt the country can’t get back on its feet." This cut must be "at least 50 percent, likely more". That won’t work from within the monetary union. Therefore, after the cut, Greece must exit the euro zone. Issing explained this in Stern as follows: "A restructuring within the euro zone would give a de facto carte blanche to Greece and other highly indebted countries to get rid of their problems through a reduction in debt." That would be "the end of the monetary union".
Issing warned of contagion to other euro countries in the current crisis. This must be prevented, as Italy is "too big to be rescued by others." The economist considers the warning from the International Monetary Fund (IMF) justified. In that event, it could collapse the entire financial system: "This danger is real."
The economist warned against euro bonds. "Those who want euro bonds will prove to be the gravediggers of a stable euro," Issing said. "In the end, previously stable states would be threatened of sinking into a debt spiral. Then the German political economy view would be smothered. Then, the project for a stable euro would die."
Source: Schuldenschnitt und raus aus dem Euro, Stern