Economics Professor Steve Hanke praised China’s recent move to lower its reserve requirements and predicted further troubles for Greek banks unless recapitalised.

Hanke, who is professor at Johns Hopkins University and Senior Director of the Troubled Currencies Project at Cato Institute, said this in a recent interview for Russia Today.

China recently lowered its reserve requirements as means of adding stimulus without changing interest rates, which Hanke assessed as a good move.

In his words the country had rightly understood that money supply and credit supply determine the rate of growth in the economy and the level of asset prices and inflation.

He reminded that China’s credit growth and money supply growth have been little below the trend rate of growth, so the country was trying to restore them to previous levels.

Hanke explained that the strong US dollar will not have a pronounced effect on China as the yuan is more or less loosely linked to the dollar.

According to him, the dollar–euro rate will be key as it will determine where commodities are going.

Hanke said that emerging markets will be faced with greater risks as commodity prices are going down, while the dollar is getting strong.

He predicted that the trend will be for money to be coming out of emerging markets as the dollar remains strong and commodity prices weak.

Regarding the Greek sovereign debt crisis, Hanke said that the country has been in deep trouble and in some form of bankruptcy ever since it became independent in the 19^th century.

He explained that the money supply in Greece has been shrinking at 6 % per year since 2008.

Hanke revealed that 85 % of the money supply in Greece was created by banks.

In his words, austerity is caused by the deleveraging of banks, which shrinks money supply and the national economy.

Hanke criticised Athens of holding the EU hostage and his expectations are that Brussels will provide an additional bailout.

According to him this could be either deferral of payments on loans or new capital to recapitalise banks.

Hanke expressed concern that the banks are to be faced with massive deleverage unless recapitalised.

Watch the full interview here.

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