End Game

Economists Nearly Unanimous on Need for Greek Restructuring

By Phil IzzoAll but one of 49 economists surveyed by the Wall Street Journal last week said Greece will be forced to restructure its debt.

Fifty-three economists, who are mostly U.S.-based, take part in the survey, but not everyone answers every question. Forty-eight of the 49 respondents to the question on Greece think a restructuring is inevitable. “Restructuring, default, or forgiveness by lenders,” said Allen Sinai of Decision Economics. “There’s too much debt for Greece to pay down.”

Last week, concerns grew that the debt crisis could spread, as Italy faced bond market jitters. Just two of 44 participants said that the crisis in the euro zone will be contained in Greece. Thirteen see it moving to Ireland and Portugal, while 19 say it won’t be contained until it has reached Italy and/or Spain. The remainder — 10 economists — expect it to move even deeper into the euro zone.

“My fear is that if we can’t stop the recent Italian scare, all bets are off,” said Diane Swonk of Mesirow Financial. “My hope is that Europe comes together on this.”

In congressional testimony last week, Federal Reserve Chairman Ben Bernanke played down fears that the euro zone crisis could spread to U.S. shores. “Were there to be a significant deterioration in conditions in Europe, we would see a general increase in risk aversion, declining asset prices, a lot of volatility,” he said. But he added: “The direct exposures … are quite small and manageable, so we wouldn’t expect those direct impacts to be the critical channel if there were problems — a default, for example.”

Meanwhile, the majority of respondents — 24 of 46 — say that the European Central Bank‘s credibility has been diminished by its response to the sovereign debt crisis. “The ECB has ignored the economic context of policy,” said Ram Bhagavatula of Combinatorics Capital.

Looking toward risks in Asia, the economists, on average, said the odds are 64% that China is experiencing a bubble in property prices. “Bubbles result from excessive credit creation, as in China,” said Paul Kasriel of The Northern Trust.

Among other potential bubble markets, gold was the only one that got better than 50/50 odds, with the economists on average putting chances at 61% that the yellow metal is overvalued.