Europe may have to guarantee all Greek debt

Former Bundesbank chief Axel Weber said Europe needs to consider guaranteeing all Greece’s outstanding debt because Athens’s only viable alternative is a messy default that would be more costly and risk sparking broader financial turmoil.

In an interview with the Wall Street Journal, Weber said Europe’s response to the crisis so far addressed Greece’s immediate funding needs without offering the country a credible, long-term resolution for paring its growing mountain of debt.

“Ultimately, solving the Greek debt problem will have to deal with the outstanding, past amount of debt, and there are, unfortunately, only very limited options: Either a default or partial haircuts or a guarantee for the outstanding amount of Greek debt,» Weber said. «Governments have to decide which option they want to go for, but the current piecemeal approach of repeated aid programs inevitably leads to the latter solution.”

Many investors and economists maintain that Greece’s debt load, at 350 billion euros, or 155 percent of its forecast economic output this year, is simply too large for Europe’s current strategy to work. Weber’s comments add a prominent voice to that chorus, reflecting growing frustration in Europe over a failure to address what many consider the root causes of the crisis.

“At some point you’ve got to cut your losses and restart the system,» Mr. Weber said, drawing parallels between the guarantee approach for Greek debt and the steps Germany and other countries took during the financial crisis to backstop troubled banks.

“The Greek problem is not a short-term problem and…it was not caused by the common currency,» Weber said. «Instead it’s a deep-rooted, fiscal and structural problem that probably needs more a 30-year time horizon to solve rather than a three- to five-year horizon. The measures Europe needs to adopt to resolve this issue are much more profound than just short-term liquidity funds.”

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