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Greece's Forced Exit From The Eurozone Would Be 'Tumultuous'


Now two American economists on the Greek debt, the euro and Greece's creditors. Professor Jeffrey Sachs joins us from Columbia University where he is director of the Earth Institute. Welcome to the program.


SIEGEL: And Carmen Reinhart joins us from Harvard University. She's a professor at the Kennedy School and co-author of the book "This Time Is Different: Eight Centuries Of Financial Folly." Thanks for joining us, professor Reinhart.


SIEGEL: Today, word from Germany was that Greek will need some debt restructuring as part of any - a new loan program. Jeffrey Sachs, how significant is that admission by the German finance minister today?

SACHS: In one sense, it's been obvious to almost everybody. All during the past six months, Greece has been saying, we need debt relief, and the German government has said no. And that is a core part of the impasse that has brought us to this catastrophic situation today and to the cliff that we're experiencing and witnessing with Greece.

SIEGEL: Carmen Reinhart, do you put the German attitude toward restructuring in the same central place?

REINHART: Absolutely. And the next, I think, impasse may come on the magnitudes of the debt relief and the modalities.

SIEGEL: When you say magnitude and modalities, you mean how much of the debt would have to be forgiven and whether it would be stretched out over more time or interest rates changed. Those are still matter to be negotiated.

REINHART: Indeed. There has been, in this discussion, a distaste for putting on the table the so-called haircuts on principle. The creditors have a preference for extending maturities - we're really talking about decades - and having windows of grace periods where there are no debt-servicing payments, whereas in many of the restructurings - and there are many, many restructurings in history - the ultimate endgame has often involved - usually involved a haircut.

SIEGEL: Jeffrey Sachs, you were a signatory to an open letter to German chancellor Merkel which said, in part, now is the time for a humane rethink of the punitive and failed program of austerity. I assume, in your view, that goes beyond what the terms of a rescue are, to what conditions are required of Greek in terms of its own policies. Did you sense any movement in that direction?

SACHS: Of course. Greece is not going to have an easy situation under any circumstances. But what is required is a compromise where Greece goes through difficult adjustment and also makes its economy more competitive but at the same time, there's relief on the debt. And that's why Schauble's statement is really important and shocking at the time that it has come because all during the actual negotiations up until last week when Europe gave what it called its final offer and its ultimatum which then provoked the referendum and also provoked the closure of the banks, Germany was denying exactly what minister Schauble said today.

SIEGEL: This is finance minister Wolfgang Schauble who we're talking about, the German finance minister.

SACHS: Exactly. I've been watching this quite closely in the room of some of these negotiations, and it has seemed to me and to many other people that actually, the finance minister, in a way, was goading Greece to get out of the eurozone. He wasn't really trying to find a solution. He was trying to provoke them to leave. And Greece kept saying, but we want to be in the eurozone. We just need relief on the debt in order to be able to do that.

SIEGEL: I'd like to hear from both of you about the idea of Greece possibly leaving the eurozone. Some people, including economist Paul Krugman, have said that a Greek exit from using the euro is either inevitable or desirable or both. Carmen Reinhart, what do you think? Is it necessary that Greece remain within the eurozone?

REINHART: I think the timing would be unfortunate. A departure at this time would be under the really worst possible conditions. And I think one should not take it lightly what the adverse consequences of such a departure will be on economic activity.

SIEGEL: But you're saying this would be a bad time for it. I don't hear you saying the future of Europe hangs in the balance, and Greece has to continue using the Euro.

REINHART: I do not think that a Greek departure has imminent consequences for the rest of the periphery largely because in the last five years, we've seen a complete re-profiling of Greek debt going from being in private hands to being almost exclusively in official hands.

SACHS: But a forced exit would be tumultuous. It would wipe out middle-class savings. It would not reduce even one cent the external debt, which is all euro denominated, and it would lead to, I believe, chaotic and ultimately very, very harsh divisions within Europe itself. To cast one country out and have calamity economically, socially politically within Europe would be dumb. It's the only technical word I could come up with...


SACHS: ...Because it is so easy to avoid this. It's so unnecessary. The collapse of the Greek banks last week when the referendum was called and the European Central Bank announced that it would no longer provide liquidity support and opened the way to a full-fledged bank panic, the likes of which have not been seen since the Great Depression, is, to use another technical term, a shame.

SIEGEL: Just one other question, then. Are we in new territory here, given that Greece and Germany, as members of the European Union, aspire to a closer relationship than, say, the U.S. and Argentina when Argentina had its collapse or the U.S. and Russia when Russia had its collapse?

REINHART: Unlike the complicated Argentine situation in which after we thought things had settled down in 2005, we get maverick holdout creditors complicating the scene again, this is a government to government situation, and hopefully, in the optimistic scenario, we could see closure.

SIEGEL: Now, there...

REINHART: But I'm not optimistic. Let's just say I'm not optimistic of something very immediate.

SIEGEL: Professor Carmen Reinhart of Harvard and Jeffrey Sachs of Columbia, thanks to both of you for talking with us today.

REINHART: Thank you.

SACHS: A pleasure - thank you. Transcript provided by NPR, Copyright NPR.