In the short-term a serious crisis may be avoided, and in the long-term the EU should develop reforms to harmonize fiscal infrastructures across countries and provide International Monetary Fund-style support in order to maintain economic stability.
Philadelphia, PA (Vocus) February 27, 2010
George P. Tsetsekos, dean of Drexel University’s LeBow College of Business and a native of Greece, says that with the support of the European Central Bank (ECB), the EU should establish a financing facility to provide short-term financing support for countries like Greece that need to rollover existing debt and/or finance public deficits. The size of this facility should be close to the envisaged total amount of budget deficits of all EU countries that deviate from the Maastricht criteria (budget deficit not exceeding 3 percent of GDP), currently estimated at E110 billion, Tsetsekos says.
With relatively modest austerity programs imposed to high-deficit countries and gradual adjustments to deficits, Tsetsekos says that several countries will avoid high credit-risk premiums in the international bond markets and avoid liquidity problems. “This year the markets expect close to E1Tr of global debt financing issues,” Tsetsekos says. “The gradual adjustments to deficit-neutral balances for countries like Greece are necessary to avoid disruptions in the intra-trade flows within the European Union.”
Tsetsekos also says that an abrupt default in Greece -- an import-driven economy -- will reduce economic activity in strong export-driven countries including Germany and France because most of the trade in Europe occurs within member states. “The availability of an ECB financing facility would bring temporary stability in the markets, provide needed liquidity, and allow countries to adjust their fiscal policies to pre-crisis levels,” Tsetsekos says. “In the short-term a serious crisis may be avoided, and in the long-term the EU should develop reforms to harmonize fiscal infrastructures across countries and provide International Monetary Fund-style support in order to maintain economic stability.”
Tsetsekos disagrees with those who argue that investment bankers like those at Goldman Sachs have helped hide Greece’s problems. “Smart financial engineers devise ways to restructure, reorganize, reorder, reshuffle debt obligations, and at the end of the day, as in the case of subprime mortgages, you cannot hide the quality nor the amount of debt obligations,” he says.
Tsetsekos says it’s unfortunate that perennial habits of running public deficits without accountability and enforcement still prevail in Greece almost 20 years after joining the EU. “No matter how obligations are cascaded, eventually the accumulation of debt in declining economic conditions will result in harsh fiscal and financial adjustments,” Tsetsekos says. “While experts disagree on who is to blame for the situation, it is clear that swift and determined action is needed.”
To speak with George Tsetsekos please contact Lisa Litzinger, assistant director of communications, LeBow College of Business, at 267.242.7303 or lml64(at)drexel(dot)edu.
About Drexel University’s LeBow College of Business Dean George P. Tsetsekos
George P. Tsetsekos holds a Ph.D. in finance from the University of Tennessee, and an MBA in finance and a B.S. in electrical and mechanical engineering from the National Technical University of Athens, Greece.
He has served as dean of Drexel University’s LeBow College of Business since August 2001. Under his leadership, LeBow College has achieved important milestones including recognition by BusinessWeek, Entrepreneur-Princeton Review, Financial Times, and U.S. News & World Report.
Tsetsekos was appointed to LeBow College’s finance faculty in 1988 and served as professor of finance and director of the College’s Risk Management Center. His extensive research covers the broad areas of international finance, corporate finance, investments, and banking.
Currently, Tsetsekos serves on the boards of the Federal Reserve Bank of Philadelphia (Economic Advisory Board), The PENJERDEL Council, the Pennsylvania Economy League, the Conference Board, the World Trade Center of Greater Philadelphia, the Global Interdependence Center, and the Journal of Investing.