Bofinger Proposes Joint Euro Bonds, Haircut to Lower Greek Debt

Euro-area governments should consider haircuts and the issuance of joint bonds to cut the debt burden of countries such as Greece, said Peter Bofinger, a member of German Chancellor Angela Merkel’s council of economic advisers.

Cutting Greece’s debt by 40 percent and converting the rest of the money owned into so-called euro-bonds should lower Greece’s interest-rate payments and also stabilize the euro-area region, Bofinger told journalists in Hamburg last night.

“The higher the rates, the longer it takes and the harder it is for countries to get their debt right,” Bofinger told the Hamburg club for business journalists. “It must be in our genuine German interest” to lower “this whole debt mountain.”

Greek Prime Minister George Papandreou is seeking political backing for a new round of spending cuts and asset sales that run through 2015, as the euro region and the International Monetary Fund discuss additional financing Greece needs to avert a default. The country got a 110 billion-euro ($155 billion) bailout from the European Union and the IMF last May in exchange for measures including wage cuts and higher sales taxes.

The “punitive interest rate” Greece pays on its bailout loans means the country is unlikely to be able to lower its debt burden, Bofinger said. The country will have total debt of 400 billion euros by 2013-2014, which compares with the 500 billion euros available in the European Stability Mechanism, he said.

The failure to lower the interest rates on the debt of countries such as Greece means politics have failed “to get a head-start over the markets,” Bofinger said. The high interest rates lead to more austerity measures, which may cause higher unemployment, lower growth and less investment, said Bofinger.

To contact the reporter on this story: Niklas Magnusson in Hamburg at nmagnusson1@bloomberg.net

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.