Charles Calomiris, a Columbia University economist who was the first to predict Argentina’s sovereign debt crisis, talks in this Bloomberg interview about the possible repercussions that the Greek crisis could have for the eurozone, and the risk of contagion for other European nations. According to Mr. Calomiris, the real concern right now should be on Italy.
But before addressing the Euro zone contagion aspect Mr. Calomiris touched on the topic of speculators trading credit default swaps on Greece’s sovereign debt.
“The CDS market always requires two parties in any transaction”, said Calomiris. “So, people can’t just be on one side of the market causing trouble. But more importantly, the spreads that we saw in Greece at their worst in CDS market were at about 4%. Based on what we know from the history of sovereign crises given the current fundamentals in Greece, if anything that is a very muted response in the markets. I would have expected a much greater response and I think we will probably gonna see a greater response”.
On the subject of European politicians blaming the derivatives for exacerbating Greece’s economic crisis, Calomiris said “this is just a case of trying to shoot the messenger.”
“I think what we really need to focus on is the unsustainable situation that Greece has gotten itself into, with the highest consumption to GDP ratio in Europe ; one of the lowest labor force participation rates in Europe ; one of the highest government social protection expenditure rates in Europe ; and deficits that have been not just high these past year but outsized deficits for several years during the boom, and then of course the fraudulent accounting on top of it”, Calomiris said. He also noted that within the Eurozone, “Greece has the worst corruption score according to Transparency International which is a problem because what it is telling you is that the institutional quality of the Greek government for reforming itself is very low,” he said.
Calomiri also points out that “the real concern right now should be on Italy.”
“Italy is the country that is most like Greece in this current situation. Highest Debt to GDP ratio, not as high deficits so with smaller changes they can stop the problem. They also, however are very corrupt. They are second to Greece in the level of corruption within the Eurozone.”
