Tough call

The debt crisis in Europe is escalating – and spreading.

Italy is the most recent eurozone member to shock financial markets with its soaring debt. Meanwhile, the credit rating agency Moody's has downgraded Ireland's debt status to junk, and a temporary Greek default may now be unavoidable.

There has been no shortage of clear words about the eurozone debt crisis this week. "The crisis is now systemic," said Olli Rehn, European Commissioner for Economic and Financial Affairs.

Systemic crisis

Systemic has become a synonym not only for the financial crisis that saw the collapse of one huge bank pull down many others three years ago, but also for Europe's debt crisis, which has seen Greece, then Ireland and Portugal and now possibly Italy fall like dominos.

Not surprisingly, many observers are calling for a debt write-off, or haircut, for Greece, allowing the country to default on a chunk of its loans. The move, they argue, would reduce some of the immense pressure that has built up in the eurozone over recent months.

Even German Finance Minister Wolfgang Schäuble is willing to discuss the idea, once considered taboo. He told German television "we will use all instruments that are possible" to address Greece's debt problem, adding that "debt relief for Athens is in the catalog of considerations."

Martin Blessing, chairman of Germany's second-largest bank Commerzbank, supports the minister. Pointing to the growing uncertainty and mistrust among investors in recent days, the banker said in an interview with the German newspaper Bild that "another solution for Greece was necessary other than new credit packages." Greece, he suggested, should be allowed to "wipe out" some of its debt, adding that such a move would not cause "an earthquake for private banks in the eurozone."

Haircut time

Lars Feld, a professor at the University of Freiburg and a member of the German government's council of economic advisors, also spoke out for Greek debt relief in an interview with the same newspaper. "There is no way past a haircut for Greece," he said.

There is also plenty of talk once again about issuing common European bonds, or eurobonds. "We're only going to have peace and quiet when we have eurobonds," Professor Peter Bofinger from the University of Würzburg, also a member of the council of economic advisors, told the Rheinische Post newspaper.

At present, however, the German government is strictly opposed to the idea. Interest rates for eurobonds would be significantly higher than those for German federal bonds due to the higher risk involved in pooling debt with weaker euro nations. As a result, Germany could face higher costs if the country needed to finance new debt. Moreover, Germany, like every other country in the eurozone, would be liable for the eurobonds.

Relief inevitable

Nevertheless, many experts don't see a way around debt-restructuring in Greece. Mohamed El-Erain, CEO of Pimco, an investment management company, said told the Handelsblatt newspaper that he expects some form of debt relief for Greece within the next six months, "hopefully in a structured form."

But the finance expert believes both Portugal and Ireland will be able to avoid such a move and that neither Spain nor Italy are really in danger of having to go down this path.

With more than $1.3 trillion (917 billion euros) of assets, Pimco is one of the world's largest bond investment firms. The company, based in Newport Beach, California, is owned by Germany's Allianz Group.

Author: Henrik, Böhme (jrb)
Editor: Sam Edmonds