Eurozone crisis: Experts debate options

A number of ideas are reportedly being discussed to tackle the eurozone debt crisis.

These include a 50% write-down of Greece's government debts, strengthening big European banks that could be hit by any defaults by highly indebted governments, and boosting the size of the eurozone bailout fund, the European Financial Stability Facility (EFSF).

Here, eight economists discuss what they think will happen and what they think needs to happen in the eurozone.

Vicky Pryce

Senior managing director of economics at FTI Consulting and former UK government adviser

Last week's events, with all the market volatility, were a serious wake-up call to all international institutions and to policymakers. I think they've understood it and institutions will be set up in such a way to ensure future crises should be averted.

I think we will see a haircut on Greek bonds, a recapitalisation programme for banks and an increase in the size of the bailout fund - but you need all these things, they need to be part of a package.

Even with that, in a year's time Europe will still be pretty weak because the long-term problems will still be there - low growth and unsustainable debt.

What we have seen for Greece will have to happen elsewhere. Haircuts are inevitable for other countries too.

They have to rethink how you achieve faster growth in Europe. If you don't get back to growth then the debt problems will remain.

The next thing that needs to be looked at seriously is issuing eurobonds. That may well be what we need in the longer term to lead us back to growth.

Daniel Gros

Director, Centre for European Policy Studies

We believe a market-based approach is needed to reduce Greece's debt.

The EFSF should offer holders of Greek debt an exchange into EFSF paper at the current market price. Banks would be forced in the context of the ongoing stress tests to write down holdings in their banking book and thus have an incentive to accept the offer.

More widely, we argue that the EFSF needs to be restructured.

You cannot just increase its size because if Italy or Spain were to step out as a guarantor, that would leave France, for instance, with a share of 40%, which it could not sustain and would lose its triple-A credit rating.

It cannot work as intended, but if it were re-registered as a bank, which would give it access to potentially unlimited ECB refinancing in case of emergency, the general breakdown in confidence could be stopped while leaving the management of public debt under the supervision of finance ministers.

Professor Iain Begg

Professorial research fellow, the European Institute of the London School of Economics. Currently researching EU economic policy, governance and policy co-ordination under European Monetary Union

The one obvious thing leaders should do would be to decide rapidly on a way of moving towards genuine eurobonds.

The Germans, manifestly, are very hostile to the idea, but it is a development that seems to have so many advantages that it ought to be pursued.

The trick will be to find a formula that deals with the "moral hazard" objections by introducing well-judged conditionality.

Raoul Ruparel

Economist at Open Europe, an independent think tank campaigning for reform of the EU

Greece obviously needs to restructure. It's looking at write-downs of 50% - that's a necessary step. It finally looks like the eurozone leaders are coming round to that.

But if it's not combined with recapitalising banks and other economic reforms it won't work.

In terms of the write-downs, banks will be able to absorb the hit because they should have been preparing for it for the last year. I think it would be necessary to use the EFSF to help recapitalise these banks and provide a backstop.

At the moment there's no clear pan-European mechanism for dealing with winding down a cross-border bank. I think we need a policy for what happens in this situation, a huge policy that needs to be detailed.

They also have to look at the different needs of the eurozone - for instance, interest rates in Germany would be very different to those in Greece. Those imbalances aren't going to go away.

George Magnus

Senior Economic Adviser, UBS Investment Bank

What I think the Europeans will choose to do is leverage the capital of the EFSF (currently 440bn euros) up by borrowing 5-10 times that from the market. They would then have the capacity to go and buy all of the sickly sovereign bonds that the banks are sitting on and swap them for bonds they themselves will issue.

I don't think it would be successful. In the short run it would probably be a bit of a tonic for bank stock prices and equity markets, but it doesn't do anything to solve the problem of the euro crisis at all.

I think you need a combination of three things.

These are: a restructuring template for Greece's debt with long gross periods - three years for the interest payment and 5-10 years for the principal repayment. That template might then have to be used for other countries.

Then, to stop Greek banks collapsing, you have to support the Greek banking system. And to stop banking contagion spreading to the likes of Italy and Spain, you need a banking recapitalisation programme.

And if the ECB said they were prepared to stand by and buy any amount of Spanish and Italian bonds, then we'd raise three cheers.

Anything that stops short of cleansing the European banking system will not be enough.

Charles Dumas

Chairman and chief economist, Lombard Street Research

The problem is that the Club Med countries - Greece, Italy, Spain and Portugal - are not competitive. Even if they agree to writing down Greek debts and increasing the EFSF, that will only be successful in postponing the issue for a few more months. It won't stop debt going up.

For the euro to survive the only solution is for the Club Med countries to leave the single currency. I think Ireland could stay in the euro as, although it's banking system is a mess, it is cost competitive - exports make up most of its GDP - so it is possible to turn the economy round quite fast.

Holger Schmieding

Former economist at Merrill Lynch/Bank of America, now chief economist at Berenberg Bank

The probability that we will get a significant write-down of Greek debt as part of an orderly programme, with an immediate recapitalisation of Greek banks, and with further European support for Greece, has risen substantially.

The key question in all this is nothing to do with Greece - but whether upon granting Greece debt relief we can protect Italy from the market panic and prevent contagion.

The risk Greece will default is now above 50%. But Greece is highly likely to stay in the euro come what may.

I would like to see the ECB commit to being the ultimate backstop - if things get really ugly the ECB should buy more government bonds.

Professor Charles Wyplosz

Professor of economics at the Graduate Institute in Geneva, specialises in monetary integration, monetary policy and financial crisis

Discussions about the EFSF are irrelevant. It shows policymakers haven't zeroed in on the crisis and what to do about it. The EFSF currently has 440bn euros. The amount we're talking about for Italy and Spain, as well as Greece, Portugal and Ireland could be 3.5 trillion euros.

I think that Greece will inevitably default, and I believe that Italy too will have to default, but I don't see a willingness in policymakers to accept that.

The ECB is the only institution that can stop the crisis. My solution is for the ECB to issue a partial guarantee on the existing public debts of eurozone governments, of say, up to 60% of GDP. It would allow governments to default but would create a backstop.