Interview with Prof. Dr. Teodoro Cocca: “The system is already no longer self-sustaining“

Teo Cocca W28950 b 635

The debt burdens of many Western industrialised nations have risen enormously during the economic and financial crisis due to bank bail-outs and economic packages. Now a debt crisis is looming. Many countries are no longer able to obtain funding in the capital market and the central banks are stepping into the breach as the lender of last resort. How do you as an economist view this paradigm shift where central banks are suddenly buying massive amounts of government bonds from ailing states?

Prof. Dr. Cocca: It is a declaration of bankruptcy. It shows that in reality the system is already no longer self-sustaining. Without the (highly problematic) intervention of the ECB, many euro countries would already no longer be able to tap the capital markets which would mean that today these countries would already be insolvent. The measures taken by the ECB are also putting the stability of the central bank itself on the line by taking the risks of highly indebted countries onto its balance sheet. Moreover, it robs the ECB of its greatest weapon: its independence.

Inflationary pressure has intensified globally since the beginning of this year. Do you think inflation can still be avoided or is it perhaps actually desired by countries in order to find a way out of debt?

Prof. Dr. Cocca: The next big crisis could come from the inflation side. In the short term inflation risks have eased substantially because of the economic slowdown. However, in the long term it seems unthinkable to me that printing money on a massive scale will not lead to any inflation at all. As meanwhile the central banks directly involved also have an interest in facilitating a soft debt reduction process for debtors via inflation, this begs the question of who actually has an interest in rigorously combating inflation. The biggest losers here could be savers who would see their savings melt away.

While governments in Europe have tended to adopt the austerity approach in order to reduce budget deficits and sovereign debt, the USA is continuing to use state aid (stimulus) to kick-start the economy and bring unemployment down to a tolerable level. Which route do you find more appropriate, the European or the American one?

Prof. Dr. Cocca: There is a major difference here. This option is still open to the USA as the capital market is still unreservedly willing to buy US debt securities whatever the Americans decide. This is not the case in the eurozone. The market would have no confidence in a further increase in sovereign debt. Europe has no choice: it needs clear structural reforms to strengthen growth and competitiveness, as well as a disciplined austerity policy.

The European Union is currently working hard to save the common European currency. After Greece, Portugal and Ireland, the capital markets have now turned the spotlight on much bigger countries with the result that in the past few weeks there has been a huge increase in debt interest charges and credit default insurance (CDS) for less solvent EU countries such as Italy and Spain. Alan Greenspan, who headed the US central bank for almost 20 years, has predicted the demise of the euro. How do you view the future of the euro from a non-European perspective? Will it be possible to save it or not?

Prof. Dr. Cocca: It is up to the corecountries in the eurozone. If a credible deepening of the common economic and fiscal policy can be achieved swiftly, then it will be possible to save the euro. However, the last few weeks have not been very encouraging in this regard. In addition to the latent economic incompetence of many of the politicians who have voiced comments, the solidarity within the EU is beginning to fade. This is a dangerous development. We need to realise that the euro has never been as imperilled as it is now. It is highly likely that the situation is considerably more strained than we perceive from the outside. Merkel and Sarkozy must agree very quickly on the way forward. Otherwise the market will soon be forced into a completely disorderly, and consequently barely controllable, reaction.

The euro was brought in without a real European government, economic government or fiscal policy authority. Economic and capital market experts say the only way to save the euro is to introduce eurobonds as a solution to the solvency problems of the countries concerned as well as a common economic and fiscal policy. Do you share this opinion, and if so, how likely is it that the politicians in Germany, Finland, the Netherlands and Austria will agree to the creation of a transfer union?

Prof. Dr. Cocca: We already have a “light” version of a transfer union although in its present form it is restricted in terms of amounts and timescales. Well on paper at least. Naturally the de facto situation is that so far the eurozone has clearly been acting as if an implied guarantee were in place for all eurozone countries. In my opinion, Eurobonds are not a solution. In the short term it may be possible to use them to buy some time, but in the long term they just reinforce the principle that caused the crisis in the first place: it would introduce a lack of discipline into government finances in the eurozone for good. What is interesting is the move towards looking at the problem via alternative scenarios as well as at the costs they entail. This is a positive development. The costs of a transfer union need to be compared with those of a sovereign default. Let’s see what this calculation reveals.

Some currencies outside the big currency zones of the euro and the dollar such as the Swiss franc, Canadian dollar, Norwegian krone and Swedish krona have risen sharply in the last  few months. The Swiss central bank recently decided to guarantee a euro exchange rate of 1.20. Can it win the currency war against the capital markets?

Prof. Dr. Cocca: It all depends on how the euro crisis develops. If the crisis worsens severely, the SNB would have to buy a huge amount of euros and keep these on its books. Even the SNB cannot do this for ever. Although there is no restriction on the amount of Swiss francs it can sell in return, at a certain point it would trigger inflation. This would then create risks on the inflation front for the Swiss economy. The danger of an overly strong franc would have been averted, but the economy would still suffer via inflation. It is just not possible to escape a major crisis when you are a small island within Europe surrounded by turmoil. Conversely, if a swift solution is found to the euro crisis, the euro will rise again against the Swiss franc rendering the measures taken by the SNB unnecessary. It would therefore seem that the SNB is using the measure to buy time in the hope that the crisis is resolved within the next few months. But the SNB has given up one thing through this intervention: its independence.

The economy in Europe is slowing, the US economy has never really picked up and the Japanese economy has been in the doldrums for 2 decades. The forecasts for this year and next show dark clouds on the economic horizon. Is a double-dip scenario conceivable, especially as many countries are in austerity mode or having to increase tax revenues because of high debt levels?

Prof. Dr. Cocca: A slowdown in the economy looks unavoidable; the latest figures show this very clearly. However, although a recession is more likely than before, it is not certain. It should be noted that market perception of all indicators and news is very negative at the moment. In panic phases such as now, the market blanks out the good information. This is happening again at the moment. Listed companies are actually continuing to report moderately good prospects, their balance sheets are very sound and the emerging countries are still recording substantial growth.

Various European banks, especially in Greece, Italy and France, have come under pressure in recent weeks as a result of the European sovereign debt crisis. Do you think the governments will still be able to come to the rescue next time there is a banking and financial crisis or did they already lose their political and financial clout in the last crisis?

Prof. Dr. Cocca: It is true that the European governments now have considerably less capital available for rescue operations. This makes the situation today very different to the one in 2008. Consequently it could be trickier this time. But the loss of confidence has probably been even more of a problem. The market no longer believes in the leadership qualities of the top exponents in the USA and Europe. Too many big promises have been made which the politicians have then miserably failed to deliver. The political inability to tackle the crisis is frightening.

The price of gold has rocketed. Today it is worth two and a half times more than it was 2 years ago. Do you believe gold represents a safe haven investment or do you see this as more of a gold bubble?

Prof. Dr. Cocca: At this level, gold only makes sense if you assume the worst.

One final question. Robert Mundell was awarded the Nobel Prize in 1999 for his work on exchange rates and monetary and fiscal policy. According to Mundell, exchange rate fluctuations have at the very least been a contributory factor in many global economic crises (e.g. Asian crisis 1999). For this reason, he advocates the creation of a world currency. A global economy needs a global currency? The first step should be to link the euro and the dol¬ar. Do you think this is a radical idea or a likely trend for the future?

Prof. Dr. Cocca: I can’t see it. After all, Europe’s present experience shows that one currency is only appropriate if the economic development in the corresponding regions is as even as possible. Consequently a global currency would only make sense if there were no regional inequalities. In my opinion, however, this is an illusion. If there is a lesson to be learned from the present crisis, it could be that everyone is ultimately better off with their own currency because that way they retain their autonomy.

Professor Dr. Teodoro Cocca, Vice Chairman of the Board of Directors of GGI

Professor Dr. Teodoro Cocca was elected as a new member of the Board of Directors of VP Bank in Vaduz, Liechtenstein. The VP Bank is one of the three largest banks in the principality of Liechtenstein and specialises in asset management. The Bank has 800 employees in Liechtenstein and eight other countries, and administers client assets worth CHF 41 billion. Professor Dr. Teodoro Cocca is a Professor of Asset Management at the Johannes Kepler University in Linz and Adjunct Professor at the Swiss Finance Institute in Zurich. Prior to that, he worked at Citibank for several years, where he was involved in investment and private banking, conducted research at the Stern School of Business in New York and taught at the Swiss Banking Institute in Zurich. Professor Cocca (38) was born in Switzerland and has Italian roots. He is the Chairman of the annual European Private Banking Summit, which takes place in Zurich, and is an advisor to various finance companies in Switzerland and abroad.


  • Claudio Cocca - Founder and Chairman of the Board of Directors of Geneva Group International – CH
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