Despite high-profile measures such as the Greek debt deal and mass pumping of liquidity into the banking system, Europe’s problems have merely been delayed for another day, Willem Buiter, chief economist at Citi told CNBC.
“We have really just paused for breath,” he said. “It (the long-term refinancing operation) really hasn’t solved the problem, and for Europe the worst is still to come.”
He also predicted a further “large-scale ECB intervention” later this year or in early 2013. The European Central Bank injected close to 1 trillion euros ($1.3 trillion) through three-year loans at a very low interest rate into the European banking system in two operations in December and February.
While markets’ focus for much of the year has been on attempts to secure a Greek debt restructuring deal, which were finally successful earlier this month, there are now renewed concerns about other so-called «peripheral » European economies.
“There will be a further restructuring of Greece and Portugal, Ireland is at risk, and Spain has been deteriorating spectacularly in the recent past in terms of its public finances,” Buiter warned. “There’s still far too little sense of urgency, and the facilities that are available at the moment are not really adequate if Spain becomes a troika program country. We have still only seen meaningful work (in terms of restructuring) in Greece, and even that is not enough to restore the country to a sound fiscal footing.”
He added that the ECB had been “compromised” by its increased exposure to sovereign debt.
“The spirit of this [not purchasing] sovereign debt by the central bank ethic has been compromised. I think this was necessary and unavoidable. But undoubtedly it has caused dissent within the ECB and created tensions that may show up when the next large-scale ECB intervention is required,” he said.
Buiter also criticized the healthier euro zone economies for putting the ECB in the effective position of lender of last resort.
“It’s not the ECB that’s most dangerously compromised. It’s the fiscal authorities in the euro area, especially the donor countries that are unwilling and unable to deliver the fiscal resources,” he said. “The ECB is acting as a fiscal authority because the actual fiscal authorities have let the side down.”
