Willem Buiter: “We will certainly have a panic stage before the debt crisis is resolved” (part 1)

The following is my translation of an article that appeared in Het Financieele Daglad, a major Dutch financial newspaper.

The temporary pause in the European debt crisis is as deceptive as the frenzy before the New Year, says economist Willem Buiter.

The countries of the eurozone will eventually emerge from the sovereign debt crisis — with pain and difficulty. That is what Citigroup chief economist Willem Buiter, on a visit to Amsterdam on Friday during a roadshow, expects. Spain and Italy will get their finances in order and the ECB will jump in when necessary. Deep integration of fiscal policy, according to him, is not necessarily required.

"The absence of bad news today is good news. If Spain can borrow at 5% for ten years, it is better than 6% or 6.5%. In Italy the rate fell to 6.5% on Thursday. But that’s still not sustainable. It is good news to a very limited extent. It does not look like the beginning of the end as in  December, but the panic of then and the calm now are both exaggerated. We will undoubtedly experience a panic phase before this is resolved."

Psyche of the market

"In part. When the three year [LTRO] loans were announced, the markets were still in a panic. Markets are like psychotic animals, like a bipolar patient: identical situations are sometimes interpreted differently. If the psyche of the market is not stopped by determined action like the three year loans, it can cause significant damage. The markets now realize that the ECB will not allow a disorderly default in large countries. This gives Spain and Italy time to get their house in order. If this gets a robust policy response, it could be the beginning of the road out of the valley. But there needs to be execution, preferably under a troika program to build confidence.The ECB can not do it alone."

"That is the most likely outcome. It will not be pretty. The reforms that Spain needs are unprecedented since the death of Franco. The country has 44% youth unemployment. That is shocking, not only because of the economic toll, but also because of the human toll too. It’s a generational conflict. The privileges of insiders must be removed. Older people have good jobs, while young people have the choice to be unemployed or day laborers. We are fighting intergenerational conflicts, not only for public pensions and health care costs, but also in the labor market."

Part 2 shortly

Source: Financieele Dagblad