Ifo's Sinn warns EMF could endanger euro

 @ibtimes
on March 13 2010 4:37 PM

A European Monetary Fund risks skewing the incentives of debt-ridden euro zone countries thereby endangering the stability of the euro, the head of Ifo think tank told Reuters in an interview.

Ifo President Hans-Werner Sinn said Europe should not seek to solve the Greek debt crisis through such a fund.

I fear the fund would become a redistribution system, distributing the resources of the more prudent countries to the less prudent ones, Sinn said in an interview.

That would then be the remuneration for lack of good budgeting in the past and would create new opportunistic incentives for the future.

With Greece battling a debt crisis, German politicians in particular have pushed the idea of a rescue fund which euro zone countries could tap in tough conditions if they faced default.

What really irritates me is the way governments are hurriedly trying to bring this fund into being, said Sinn, adding that he could imagine the creation of well-considered EMF in the long run, with contributions linked to debt ratios.

That just goes to show that they are not trying to find a solution for the future but a solution for the current problems of Greece and other weak countries.

Sinn said Greece's successful bond issue showed markets expected an EMF to be founded -- a realistic expectation given that Germany had pronounced itself in favor of this.

Sinn said Greece should step out of the euro zone and depreciate its currency to whittle away its debts -- savings programs were not enough. This could have a knock-on effect on the euro, he said, but would not be as risky as bail-out of Greece by other euro zone countries.

I see an even greater risk to the euro if Greece's deficit is solved through transfers from other countries ... with unforeseeable consequences for the financial conduct of member countries, he said.

Sinn said the euro, which has been battered by Greece's fiscal crisis in past months, was still overvalued from a long term perspective.

Judging by the range of purchasing power parities, based on the US, OECD and German basket of goods, the euro is still extremely strong, he said.

But it has to stay overvalued for many years, so that the U.S. can reduce its current account deficit.

On the topic of regulation, Sinn said credit default swaps had strongly destabilized markets and supported a ban on selling CDS contracts to naked buyers who have no interested in the underlying asset.

Greece has blamed naked CDS trades on its sovereign debt for amplifying its difficulties in funding its budget deficit.

(Editing by Myra MacDonald)

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