Pictet & Cie’s chief strategist, Christophe Donay, has added his voice to those who argue that Greece must be allowed to default to prevent further escalation of the eurozone debt crisis.
Only this week German Chancellor Angela Merkel slapped down her vice-chancellor and economy minister Philipp Rösler after he called for the orderly insolvency of Greece to be put on the political agenda.
Merkel said the European Union (EU) would do everything in its power to avoid a Greek default and urged politicians within her own coalition to weigh their words carefully – indicating the level of internal discord that already exists.
Merkel stressed that the priority is keeping the eurozone intact and warned of the risks of domino effects should a default happen. She has moved to reassure Greek Prime Minister George Papandreou that he has her full support in his efforts to reform the Greek economy.
But Donay, who is based in Geneva, states unequivocally that there is only one solution to the European debt crisis: allow Greece to default and do it now. He believes EU efforts in trying to avoid a Greek default are damaging broader financial markets and, in fact, worsening the crisis.
But he is fearful that a default won’t be allowed to happen because politicians such as Merkel are unwilling to contemplate failure of the EU project, and also because they, the International Monetary Fund and the European Central Bank are afraid of the domino effect that such a scenario would have on Portugal, Spain and Italy.
“They want to escape from default and restructuring and for political reasons they decide not to take it, but you lose time and time is money in markets,” states Donay. “Eurozone politicians’ responses have taken too much time. This factor has led to an intensification of the crisis and this is also why Greece is not the only problem today.
“If you give markets enough time to consider the basic problem – which is how to address the trajectory of the debt and of economic growth – you box yourself into a corner without any solution other than restructuring. This is not an option; it’s the only solution we have.”
Donay cites Maastricht criteria which states that to achieve 3% economic growth, the ratio of annual government deficit to GDP must not exceed 3%, while the ratio of gross government debt must not exceed 60%.
To stress his point, he notes that Greece’s public deficit has hovered around 10% of GDP, while its public debt to GDP ratio has soared to 160%.
To make the situation sustainable, by his calculations he says Greece would require 21% nominal GDP growth per year for a decade just to bring its public debt back down to 60%; while it would take the nation 45 years to repay its debt assuming 3% annual GDP growth (which it is nowhere near achieving) and a 2% current account surplus target.
“Forty-five years is probably too long for markets and investors,” says Donay, wryly. “This is why there is no easy way out and potentially no way to escape from restructuring.”
He outlines three things Europe needs to do. Firstly, he pleads with politicians to allow Greece to default and restructure to avoid a worsening crisis. Secondly, he says help will be required for banks and private players to avoid the financial shock and losses which a default would create.
And lastly he says hope must be created for the Greek population. “If you restructure you will implement austerity measures and these will not be acceptable for the population,” he says. “So how to create hope? Through economic growth, it’s the only way. There is leeway to act as a European group to boost growth and set up a European budget devoted to European growth.”
He concedes that the euro is under pressure and envisages a situation where there is a two-speed currency with a new euro around the safest core countries.
