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‘America will have to pay the bill for eurozone crisis’

Published time: August 15, 2012 13:05
Edited time: August 15, 2012 17:22

‘America will have to pay the bill for eurozone crisis’

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When America insists on international bailouts for the eurozone it simply wants to rescue the money of its own investors, Hans-Werner Sinn, the President of the IFO Institute for Economic Research in Munich told RT.

The German economist pointed out that the US government hasn’t rushed to bail out its own drowning states, such as California, as they face bankruptcy.

Sinn warned the widespread investor tactic of privatizing profits and nationalizing debt won't cut it in the eurozone because with its 2.5 trillion euro GDP Germany simply cannot bail out 12.5 trillion euro of total debt of Europe, so they are going to have to do it on their own.

Hans-Werner Sinn told RT's Oksana Boyko that since the American insurance companies have insured sovereign debt of Southern Europe with CDS (Credit Default Swap) contracts, once they default – the Americans would have to pay the insurance indemnification payment.

Hans-Werner Sinn
Hans-Werner Sinn

­RT: How does the Eurozone crisis affect the American economy?

Hans-Werner Sinn: The problem is that in five [European countries in crisis], including Italy, we have a government debt of nearly 3.5 trillion Euros and a banking debt of more than 9 trillion Euros. So we’re talking about 12.5 trillion Euros.

This debt is also assets sitting in some portfolios of investment companies throughout the world, including American investment companies. So it is obvious that they are very afraid of not getting their money back, if some of the Southern European countries default and they look for someone else to pay them the money.

This is why they urge Germany in particular to step in and agree to an expansion of the debt, the banking union which would socialize the debt in Europe. It is always the case that the investors look for someone else to pay the bill.

In addition there is of course an American involvement. So far, the American insurance companies have insured the state debt of Southern Europe with CDS (Credit Default Swap) contracts, so should they default, they would have to pay the insurance indemnification payment. And clearly they want to avoid that.

RT: You recently made a point that the US, economically speaking, is not practicing what it preaches. On one hand it pushes Germany to provide money to bail out Greece and embattled countries. But on the other hand nobody is talking about bailing out California, for example, which is also heavily in debt.

HWS: Yes, what I find very surprising is that the US would never think of bailing out California when it goes bankrupt. Every state is responsible for itself and if there is a loss, it has to be borne by the creditors of that state.

But at the same time they argue in Europe there should be international bailout. This is all too obvious they want to save and rescue their own investment.

RT: The collapse of the Soviet Union was taken as a proof that socialism as an economic system is not sustainable. We’re seeing a lot of crisis in the capitalist countries. Do you take it as a sign that capitalism in its classic current form is not sustainable either?

HWS: I believe that capitalism is sustainable and I think that the market economy is really no doubt a better alternative. But this kind of turbo-capitalism which we’re seeing in recent years, this irresponsible capitalism resulting from the gamble for resurrection played by the banks that invested in risky enterprises, hoping that their profits would be privatized while at the same time expecting to be bailed out if something goes wrong – this kind of  capitalism should not have a future.

RT: We’re seeing a very strange situation. Germany is asked to provide help to those [Southern European] countries, but on the other hand we’re seeing citizens of those very countries taking money out and spending it in Germany. How do you explain that?

HWS: The problem is that the Southern European countries are not competitive anymore. With the cheap credit that the Euro provided inflated too much, price levels are way above a sustainable equilibrium. Now, the European Central Bank prints money and helps those countries with cheap credit, which is way below market rates. And they make it possible to continue buying goods in the rest of Europe with this newly printed money. The whole thing is a mess, and we have to find solutions to pacify the European situation, which in my opinion can only be a temporary exit of some European countries. This will reduce the value of their currencies; they recover and can return later, at a new exchange rate, into the currency union. Everything else is dreaming. Our politicians dream of a solution with more and more money. They have the impression that putting money in the window would solve the problem. In fact it is a bottomless pit.

RT: Some economists suggest that rather than kicking Greece or Ireland out of the Eurozone, it is Germany that should take the lead and exit the union. What do you think about that proposal?

HWS: I don’t think any country should be kicked out of the European Union, but some countries are so expensive that they won’t make it in the Eurozone. Greece is a good example. They have to come down with their price level by 37 percent to be on the Turkish level. They have the same wine, the same water and the same food as Turkey, so basically they cannot be more expensive.

You cannot achieve that in the Eurozone. You cannot cut wages and prices to such extent to make the country competitive because then it would be breaking up. The only solution for Greece is to exit, hopefully temporarily, and return later at a new exchange rate into the Euro. Why this is such a catastrophe? If the politicians say it is a catastrophe, they might make it a catastrophe. It would be much better to see this less dramatically.

RT: Many economists see Spain as major reason for concern as well. Its government debt stays at 72 per cent of the country’s GDP. Its banking system is quite unstable. Do you think that Spain will become the next black hole for German finances?

HWS: We have the competitiveness problem in Spain, too. But it is not as severe as in Greece and Portugal. According to a study by Goldman Sachs, Greece has to come down by 30 percent in its price level, Portugal by 35 percent and Spain by 20 percent. So it is a completely different situation, 20 percent is possible.

If you think of Germany, since the announcement of the Euro at the Madrid summit in 1995, from then to 2008, the Lehman crisis, Germany depreciated – or devalued – in real terms, as we say by having a lower inflation rate than the other states in the Eurozone, by 22 per cent. So [Spain’s] 20 percent in that order of magnitude with a decade of stagnation is a possibility, not a pleasant one.

Germany had its own crisis under the Euro, and recovered only after the financial crisis. A similar crisis is foreseeable for Spain. If Spain wants to do it that way – the hard way – they’re invited to do so. But Spain is too big to be bailed out in a similar way to Greece. Greece has received 214 per cent of GDP as aid; how can we do that for Spain? The sums become astronomical, too big for the rest of Europe, and I think everyone knows that.

RT: How much deliberation we can really afford on deciding what to do with the Euro?

HWS: The problem of the Southern European countries, a total bank and government debt of 12.5 trillion Euros is too big for Germany to solve. Germany’s GDP is 2.5 trillion. The only possibility is that the investors themselves accept some haircuts. If banks in Spain, for example, have a problem because of toxic credit to real estate investors, than the creditors of the banks would have to lose their money.

First of all they can try an equity swap: Hand over their shares to the creditors, in exchange for haircuts. That would be a fair deal for the creditors. The equity owners would lose their money – well, they had the risk, that’s their function. If that is not enough and the losses are larger, then the creditors would have to lose a little bit more. But they can do it, no one else can do it. They own all these claims, therefore they are the only ones that have capacity to bear the losses. You cannot shift that to the taxpayers of other countries.

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