Bloomberg News

Rajan Says Greek Bailout Fails to Resolve European Debt Crisis

March 13, 2012

Raghuram Rajan, professor at the University of Chicago and former chief economist of the International Monetary Fund, said the latest bailout of Greece won’t resolve Europe’s debt crisis.

“The European Central Bank has bought some time for the politicians,” Rajan said on Bloomberg Television’s “Bloomberg Surveillance” with Tom Keene. “Unfortunately, every time they buy time the politicians do not use it well. I think we are again in that kind of situation where we are sort of struggling for a longer-term solution.”

The European Central Bank has made three-year loans to the region’s lenders in a bid to avert a credit crunch after the market for unsecured bank debt seized up last year. Euro-area finance ministers signed off on a second Greek bailout, clearing the way for the first payment from the 130 billion-euro package ($170 billion) to be made this month.

The IMF’s financial role in Europe may be smaller than its region’s policy makers would like, he said. “The IMF is facing a lot of pressure from its membership, which is basically saying, you have gotten too involved,” and Europe needs to lead “in solving its own crisis,” Rajan said.

The International Monetary Fund said March 8 that while the economic program in Greece is “ambitious,” authorities are making steady progress and plan to have reforms in place “as soon as possible.”

Portugal faces many of the same concerns Greece has, while Ireland is “more competitive today” though still struggling, said Rajan, author of “Fault Lines,” a look at why the financial order is prone to creating bubbles.

Portugal Versus Greece

“I think if you look at Portugal, it has the same problem that Greece has, which is relatively slow growth, a very high euro, an uncompetitive economy and clearly very high levels of debt,” he said. “So Portugal is going to struggle to deal with its issues.”

Ireland has “a very different set of problems from Greece,” the economist said. “In Ireland, the problem is not so much the government has got into trouble but the government, by supporting the banking sector debt, has in a sense bitten off more than it can chew.”

While financial upheaval can result in economic disruption, a growing risk has become political turmoil, Rajan said.

“We usually think of the financial sector as the source of contagion and it still might be,” Rajan said. “But as important now is the political atmosphere,” such as “riots in the streets of Greece.”

Greece is now in line to receive more than 100 billion euros in the next three years from the European Financial Stability Facility, the euro region’s temporary rescue fund, after euro-area finance ministers signed off on the bailout.

To contact the reporters on this story: Steve Matthews in Atlanta at smatthews@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net


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