Transcript | 8. lecture: Possible ways out of current situation, real solutions (Juraj Karpiš) - University for modern Slovakia

The debts of the countries and private sector have reached in present day extreme, and in regard to existing economic growth, unsustainable figures. The total debt of countries and the reduction which is required to achieve sustainable debt level of 180% of GDP (180% arises from the stable debt level in which households, state and private sector have 60% each, at the interest of 5% and the nominal growth of economy of 3%).

The debt reduction needed for achieving the level of 180% of GDP in % of financial assets of the household of that country.

Source: The Boston Consulting Group: Back to Mesopotamia? Sep2011

The debt crisis leads to the situation when some countries of EMU are at the edge of going bankrupt. Nowadays it is not possible to find any painless solution. One day comes to the deficits reduction and rise of debts. The price for this would be the decline of living standard but as soon the problem is going to be solved as lower the costs for its solving would be. To solve the debt crisis is required:

• Restructurization of debts of problematic countries (Greece, Portugal, Irish banks´ debt)
• Elimination of insolvent financial institutions in fastened bankrupting process and assets auctions, to guarantee the deposits within existing deposit guarantee with assistance of ECB, to recapitalize from the national resources of systematically important banks and reprivatize
• Fundamentally consolidate the public finances of the Eurozone countries
• Reform bank sector and separate deposit (100% of reserves) and investment banking, and prevent development of similar crises in the future
• Reform the functioning of Eurosystem, to make differences between bond risk of individual countries, to limit production of money in the system, to connect euro to a commodity or fully privatize production of money
• For common functioning of a monetary union is not needed a fiscal union. Historically, the whole world was a monetary union – it used gold as a means of payment. To secure not to have unbalances is needed only a credit promise that debts of one country stays as a problem within this country, and there is a real threat of going bankrupt – to punish irresponsible creditors.

It is not rhetoric that too big debt is not possible to solve by the other debt, it is a fact. The fact which, besides others, says also Bill Gross, CEO of the biggest bond fund in the world - PIMCO. The helping mechanism of EU (Euroval) represents this effort. Countries which have problems with high debt themselves should lend to countries in even bigger debt. The guarantees of the countries to other countries threaten their own rating (Italy, France). The existence of EFSF and its use reduces tension of private debts and paradoxically ease the further indebting. EU has a problem to find a mechanism by which it would force the countries using its help to undertake painful measures. Greece does not privatize, Italy does not save enough. At the same time, the effort to put a political pressure from abroad leads to rise of nationalistic passions within the union.