Legendary US investor George Soros has called for comprehensive debt relief for Greece. "Everyone knows that it can never pay back its debt," he said in an interview with SPIEGEL ONLINE. Greece is close to a primary budget surplus after a lot of pain and suffering, says Soros, whose speculation against the pound forced the UK to withdraw from the Exchange Rate Mechanism in 1992.
"If the official sector could forgo repayment as long as Greece meets the conditions imposed by the troika [of the International Monetary Fund (IMF), European Central Bank (ECB) and European Commission]," Soros added, "private capital would return and Greece could rapidly recover. I can testify from personal experience that investors would flock to Greece once the debt overhang is removed."
Greek Prime Minister Antonis Samaras has also recently called for a new round of debt relief for his country. "What is important to me is not to procrastinate too much for a solution," he said. But the German government in particular rejects a writedown of Greek government debt. At most, it wants to discuss lower interest rates and longer loan maturities -- measures that many economists do not regard as being sufficient to solve the problems.
In addition, the German head of the European Stability Mechanism (ESM) permanent bailout fund, Klaus Regling, pointed out that debt write-downs are prohibited under ESM rules. The majority of Greece's debt is now held by public institutions, i.e. the IMF, the ECB and other EU member states. If these debts have to be written off, the cost wil be met by taxypayers.
German Leadership Can Surmount Issues
Soros recognizes this problem: "The official sector cannot write down its debt because that would violate a number of taboos, particularly for the ECB." These issues, however, could be surmounted under German leadership.
And if any country were to recognize how such an approach could work, he argued, it was Germany, which "ought to remember that it has benefited from debt writedowns three times, with the Dawes Plan, the Young Plan and in connection with the Marshall Plan."
On the other hand, French insistence on war reparation payments after World War I led to the rise of Adolf Hitler and the Nazis: "The Golden Dawn in Greece is a similar development."
He added: "The situation that emerged from the crisis is neither tolerable nor stable...The current situation is not the result of an evil German plot. But Germany cannot escape the responsibilities and liabilities that go with that role. Germany must learn to act as a benign hegemon. Doing so would earn Germany the lasting gratitude of the other countries that are currently subordinated to it, just as the United States earned the lasting alliance of Europe with the Marshall Plan." Failure to do so, he warned, would lead to the disintegration and eventual breakdown of the European Union.
"Many nations have lived through nightmares and survived. However, the European Union is not a nation; it is an incomplete association of sovereign states that will not survive a decade or more of stagnation. That is not in Germany's interest. It would leave Europe worse off than it was when it embarked on the European Union."
Soros, who with an estimated fortune of $20 billion (€14.7 billion) is one of the world's richest people, is rather more optimistic about the current political crisis in Washington. "The government shutdown and the threat of default is an elaborate political theater but markets can anticipate the outcome: no default and a defeat for extremists in the Republican party. That said, changes in US monetary policy have far-reaching effects on the developing world."