Benzinga Radio: Why Greece Should Kick the Can One More Time

I spoke with Jacob Kirkegaard, research fellow at the Peterson Institute for International Economics on the Eurocrisis and ways forward for Greece (and for investors!) leading up to the next Eurogroup meeting on July 11. Kirkegaard warned investors to prepare for instability on the short term no matter the news. “There are a lot of political obstacles that need to be cleared before July 11,” he said, citing several upcoming votes in Greek parliament. “The real risk [for Greece] is that some accident could happen – a demonstration turning violent and people getting hurt – and that could set the mood for the vote.” Barring a surprise of that sort, Kirkegaard believes austerity measures are likely to receive the votes necessary to be implemented by the Greek government. Given Greece's bailout last summer and its months of insolvency, it may be difficult to justify such measures as solutions to the country's debt problem, which is clearly systemic. According to Kirkegaard, the rationale is in delaying the risk of contagion:

“When you believe a debt restucturing in Greece is inevitable, then the real question becomes what the circumstances are under which a debt restructuring can be carried out with limited risk of contagion. Seen in that light, buying another couple of years through this deal is not to allow Greece to get out of the insolvency that it is in but to buy enough time for the European banking system to be better capitalized and for countries like Spain to be on firmer fiscal footing. In that situation, if you do a restructuring that leads to significant losses for private bond holders, it's not clear that the risk of contagion will be as acute as the risk of contagion is today. So I would argue that in fact, postponing the inevitable [in Greece] actually has significant systemic implications.”

The key to stabilizing the Eurozone is to buy time, then. What's the outlook for the next few weeks?

“Stand by for a tremendous amount of volatility. I will say that I do believe the measures will pass the Greek parliament and the money will come from the Eurozone, and through that deal there will be voluntary participation from a number of European banks that will agree to roll over part of their exposure to Greece - and they will be able to do it without a credit event. And therefore, the ECB will not shut out Greek collateral from its transactions. The Eurozone will muddle through the next couple of weeks.”

Be sure to check out the audio of the interview in its entirety: Peterson Institute's Kirkegaard on Why Greece Should Kick the Can One More Time

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