European Austerity Strategies from World Economic Forum in Davos

SUSIE GHARIB: The outlook for Europe`s economy and how to resolve its debt crisis is topic “A” in Davos this week, where CEOs, heads of states and billionaires are meeting at the Swiss resort for the annual world economic forum. Also attending, U.S. Treasury Secretary Timothy Geithner who urged European leaders today to put more cash in their bailout funds.

SUSIE GHARIB: Joining us now to talk more about that and the other headlines coming out of Davos, Scott MacDonald. He`s head of economic research at MC Asset Management Holdings. Hi Scott, lots to talk about.


GHARIB: Absolutely. The big debate in Davos over this Europe`s bailout fund, we`ve got on the one side Germany`s Angela Merkel saying, we need more austerity measures, not more money in the bailout fund. And pretty much everybody else stacked up on the other side. Besides Geithner there is the IMF Christine la Guard. There is George Soros, many others saying you need to put more money in these bailout funds. What do you think? What is the better strategy?

MACDONALD: Well, I think the issue that you`re facing is you have to have some degree of economic growth. The problem right now is with the austerity plan, you`re not going to have any economic growth. And in some ways it becomes totally punitive after a while for a country like Greece which contracted over 5 percent last year. So you`re going to need a little bit more funding on the side, a little more flexibility. And you have to have some degree of growth within the European Union to allow these countries to work their way out.

GHARIB: Well, it is interesting you say that because also at Davos, economist Troy Davig who is very good at making predictions was getting a lot of attention saying there is a possibility of a severe recession in Europe and these austerity measures are going to make it worse, so you need the growth. But we`re not hearing any policies from any European country about how to achieve growth. So how is this going to play out?

MACDONALD: Well, I think the issue is look, the governments are not spending both on the national and sub-national level. The banks are not lending. The banks are borrowing from the ECB under a longer-term facility. You don`t have capital being pumped into the economy from really any direction. And most major corporations are being — playing it very safe. So there`s not a lot of prospects for growth here. For them to loosen things up would require probably countries like Germany to back off a little on austerity, to provide growth in the German economy which in turn would probably help some of the southern European economies or the peripheral economies. Without that, you have this problem.

GHARIB: Talk about the peripheral economies, there is Greece. There was a lot of talk about the debt crisis in Greece and speculation that a deal with Greece`s creditors might be reached this weekend. How realistic is that?

MACDONALD: I think, you know, let`s put it this way. I think everybody`s hopeful there is an agreement. But the issue is, even if you get the agreement, it`s a 50 percent haircut that`s been discussed. The debate has been over the size of the interest rates that are paid out. But even if you get this deal done and you reduce the debt, you`re only going to take Greece`s debt down to 120 percent of GDP by 2020. That`s not going to resolve the issue. So I think if they get the deal done, use still have a big problem with Greece going forward.

GHARIB: As Tom mentioned a moment ago, Fitch Ratings cut the ratings on a couple of countries including Italy and Spain. Are these the new — the next ones in the crisis limelight? How worried should we be about Italy and Spain?

MACDONALD: Well, I think you should be very worried about Italy and Spain. I think from the standpoint that they have to do a considerable amount of financing, you have a big spike in Italian financing that comes
up at the end of February. And between February through June, I think, it`s close to a hundred billion dollars that has to be financed. Spain has financing. Other European sovereigns have financing. And the really scary thing is you look at where Portugal`s going. Portugal`s five-year CDS is well over a thousand right now which puts — it`s heading towards the Greek levels. So there`s a lot here to be very concerned about going forward.

GHARIB: And everybody is very concerned about all of that. Scott, thanks for coming on the program tonight.

MACDONALD: Pleasure`s mine.

GHARIB: We`ve been speaking with Scott MacDonald at MC Asset Management Holdings.

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