Buiter Says Greek Debt Maturity Extension Wouldn’t Solve Problem

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By Svenja O’Donnell and Ken Prewitt

May 10 (Bloomberg) -- Citigroup Inc. Chief Economist Willem Buiter said that extending the maturities of Greek debt won’t solve the country’s underlying solvency problem.

“Extension of maturities is of course the final option that would allow them at least to get over the funding gap in 2012,” he said in an interview with Ken Prewitt on Bloomberg radio from Edinburgh. “It doesn’t solve the underlying solvency problem of the Greek sovereign.”

Standard & Poor’s yesterday cut the country’s debt rating two notches to B, citing the likelihood that Greece may need to restructure its debt. Euro-region officials said after an unscheduled May 6 meeting in Luxembourg that Greece needs “a further adjustment program.”

“It’s clear that Greece will have to find money somewhere in a hurry,” said Buiter. Greece “can’t get it in the market, so we either need a new package, an extension of the existing package, or rapid privatization of assets.”

German Chancellor Angela Merkel today refused to commit to more aid for Greece, saying that it is still too early to decide whether the Greek government will need more financial help to overcome the debt crisis.

“The consent has to be unanimous so it’s going to be very, very difficult” to get another bailout, Buiter said. “It’s an investment of reputational capital by politicians. It doesn’t really make a lot of sense as you really are lending to an entity that’s insolvent.”

‘Ponzi Finance’

Buiter said that further lending to Greece would be futile.

“The way to deal with insolvency is not to lend more to the insolvent party, that’s Ponzi finance,” he said. “What you have to do is to face up to the reality of restructuring” which means taking “the necessary steps to restructure the sovereigns and the banks that are exposed to the sovereigns.”

Greece has slashed spending and raised taxes to reduce a budget deficit that reached 15.4 percent of gross domestic product in 2009, requiring a 110 billion-euro ($158 billion) bailout from the European Union and International Monetary Fund. Buiter criticized the Greek policy of raising revenue.

“Last year Greece responded to the tax shortfall by having tax amnesty,” he said. “That’s always a measure of despair which gives you money upfront in return for a complete undermining of your tax enforcement credibility in the future because everybody expects the next tax amnesty five years down the road.”