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An independent advisory panel of German government said on Tuesday that a mechanism allowing member states to go bankruptcy should be created in the eurozone to prevent crises.
German Council of Economic Experts, known as "Five Wisemen", said in a special report on Tuesday that recent conflicts and tensions between Greece and its creditors had shaken the eurozone' s foundation and underlined the urgency for further reforms.
According to the council, a mechanism for orderly sovereign insolvencies should be created to complement the eurozone's current crisis policies and to ensure the area's no-bailout clause credible.
Such a mechanism would force creditors to shoulder losses if states went bankrupt and would spur investors to assess sovereign risk in more detail, the council said.
It added that although the introduction of fixed debt thresholds for bankruptcy proceeding was not practicable in the near-term, euro zone governments should immediately start work on the mechanism in order to reduce the chance that taxpayers would again have to take over the risks of sovereign bondholders.
"To ensure the cohesion of monetary union, we have to recognize that voters in creditor countries are not prepared to finance debtor countries permanently," said Christoph M. Schmidt, chairman of the council.
The council also recommended that the euro zone should "stand firm against any uncooperative, debt-stricken government", and an exit from the euro zone must be possible as "an utterly last resort".
"Strict adherence to euro area fiscal rules remains the only way for governments to deal with high sovereign debt... A permanently uncooperative member state should not be able to threaten the existence of the euro," the council said.
The special report was published as creditors and Greece started preparatory talks on a new multi-billion euro bailout program, the country's third one within five years.
Greece will not be able to receive the fresh aid worth up to 86 billion euros (about 94.9 billion U.S. dollars) from international creditors unless it implemented harsh austerity and reform measures which were criticized by Greek people as humiliation imposed by Germany.
The council said that the economic turnarounds in other indebted countries such as Ireland, Portugal, Spain, as well as in Greece until the end of last year, showed that the principle "loans against reforms" could lead to success.
"For the new program to work, Greece has to show more ownership for deep structural reforms. And it should make use of the technical expertise offered by its European partners," the council said. Enditem
