Economist: Default before it’s too late

IRELAND, Greece and Portugal should default, sooner rather than later, according to a former ECB economist working with the German Institute for Economic Research.

Dr Ferdinand Fichtner said the choice facing troubled eurozone countries was either to default with a substantial haircut for creditors of about 50% or increase the repayment period for loans and lower interest rates.

As support among economists grows for restructuring debt, German Chancellor Angela Merkel warned that no decisions can be made until the EU/IMF team reports from Athens.

There was fury with the news that the Greek deficit was 13.5% more for the first quarter of this year than for the same period in 2010, showing that Athens is failing to meet targets.

European Commission Economics chief Olli Rehn said Greece was still “living beyond its means” and claimed that restructuring their debt would not solve the country’s problems.

The options presented by Dr Fichtner were discussed at the spring meeting of economists working in think tanks in 20 European countries — the Association of European Conjuncture Institutes — in Germany.

While they did not agree on which options should be taken, there was consensus that for Greece in particular, the debt was too high.

Dr Fichtner said: “Ireland is in a very different situation to Greece. Ireland is thinking about an extension of its rescue package. I’m not sure this is really helpful for Ireland and Ireland should go for default.”

He said defaulting now or next year would put the countries in a better place to recover rather than carrying on with extremely high interest rates, but politicians were playing for time.

The ECB is opposed to default because they have €50bn of Greek government debt on their books, some of which they would lose and which would have to be made up by eurozone member states.

Dr Fichtner pointed out that the European Financial Stability Fund, from which the Irish and Portuguese loans come, does not have preferential creditor status and would lose money in any default.

However, if the countries could make it to 2013 when the European Stability Mechanism comes into force, they would be preferred creditors, like the IMF, and would not lose out.

He believes it will be difficult for the bailout countries to return to the markets as planned and that, following default, the eurozone would need to introduce some type of eurobonds to provide ongoing funding.