Bloomberg News

Moody’s Analytics Economist Urges Bigger EFSF to End Crisis

October 19, 2011

(Updates with Moody’s Analytics information in last paragraph.)

Oct. 19 (Bloomberg) -- European policy makers can help end the debt crisis through an orderly Greek default, interest-rate cuts, further bond purchases and a bigger rescue fund, said Steven Cochrane, head of economic research at Moody’s Analytics.

“Our expectation is that there’s no way for Greece not to default,” Cochrane said at an event today in Limassol, Cyprus. “Our assumption that we have fed in our forecast for the European economy is that bondholders of Greek debt will be taking a haircut of about 60 percent.”

Policy makers should ensure that the default remains orderly, Cochrane said, adding that it may happen “sometime next year when the economy might be in stronger shape to survive the event.”

Cochrane also called for the European Central Bank to continue buying Spanish and Italian government bonds to help boost consumer and investor confidence and keep yields below the “survival rate” of 6 percent. The ECB should also reverse this year’s interest-rate increases, he said.

“The risk of inflation is much less than that of a downturn in the economy,” Cochrane said.

He also called for increasing by as much as fivefold the firepower of the euro area’s temporary rescue fund, the European Financial Stability Facility. A 2 trillion-euro ($2.8 trillion) EFSF “is not an unfair figure,” he said. “What is needed is that there are resources to cover the entire area,” including Spain and Italy.

New-York based Moody’s Analytics offers risk management solutions and is affiliated with Moody’s Investors Service.

--Editors: Jeffrey Donovan, Fergal O’Brien

To contact the reporter on this story: Stelios Orphanides in Nicosia at sorphanides@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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