Southern euro-region countries need debt relief to revive economic growth and creditors should pay the cost, said Hans-Werner Sinn, head of the German-based Ifo economic institute.
The Asian financial crisis that started in 1997 was resolved with debt forgiveness rather than by drawing on taxpayers’ money, providing a model that European policy makers should use, Sinn said in an interview.
“Households and companies are over-indebted, banks are over-indebted, states are over-indebted and national central banks are over-indebted” within the euro system, Sinn said in Berlin on July 2. “It’s not nice for the creditor to recognize that he won’t get his money back, but the sooner he faces the truth, the better.”
Sinn’s stance reflects misgivings in Germany about euro-area bailouts that began in 2010 with Greece, European Central Bank steps to boost lending to companies and households and the decision by political leaders, including German Chancellor Angela Merkel, to keep the currency union whole.
Italy’s debt rose to 2.15 trillion euros ($2.9 trillion) in April, approaching outstanding borrowing of top credit-rated Germany at the end of 2013. Greece’s debt, now mainly in the hands of public creditors, is 175 percent of gross domestic product while more than a quarter of the workforce is jobless.
With debt burdens at “almost unbearable” levels, “we need a debt conference in Europe to grant partial debt relief to the southern countries,” Sinn said. “This has to be negotiated jointly, since it involves several countries.”
The currency area’s southern members have failed to cut prices and costs as much as they need to regain competitiveness and while slowing inflation there shows adjustment is under way, talk of deflation in the euro area is misplaced, Sinn said.
ECB President Mario Draghi has repeatedly said policy makers are willing to buy debt from securitized loans to government bonds to prop up inflation. He’ll start to buy asset-backed securities within a year, according to more than three-quarters of respondents in a Bloomberg Monthly Survey.
Removing toxic loans from banks’ balance sheets would help make lenders fit for the stress test the ECB is running until October, said Sinn, whose institute is based in Munich. Yet the ECB doesn’t have a mandate to channel investment to parts of the economy where they wouldn’t otherwise flow, he said.
“The issue of possible deflation dangers is being used to prepare a policy of quantitative easing by the ECB that serves not only to combat deflation, but also to save the banks,” Sinn said. “But that raises the question of whether the bank is even allowed to do this, or whether it should.”
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