Greece urged to give up euro
THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.
The Centre for Economics and Business Research (CEBR) [www.cebr.com/ ] , a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.
Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.
Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight.
“So part of the package of leaving the euro must be to convert the debt into the new domestic currency unilaterally.”
Greece’s departure from the euro would prove disastrous for German and French banks, to which it owes billions of euros.
McWilliams called the move “virtually inevitable” and said other members may follow.
“The only question is the timing,” he said. “The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.
“Could this be the last weekend of the single currency? Quite possibly, yes.”
Spain races to avert banking crisis as euro faces slide
One of Spain’s biggest banks was this weekend negotiating a merger with five smaller rivals as part of a desperate government effort to restore confidence in the faltering economy, which threatens to drag down the rest of the eurozone.
Caja Madrid, the country’s second-largest savings bank, opened talks in the hope of beating the June 30 deadline to tap a €99 billion (£84 billion) government bank rescue fund. The Spanish government wants the 45 regional caja banks to shrink to 15.
Spain was hit by a credit downgrade on Friday, sending the euro lower. The currency faces further pressure from Greece, which is studying plans to restructure its debt despite a multi-billion-euro bailout from Germany, France and the IMF.
The Centre for Economics and Business Research (CEBR), a London economics consultancy that is advising the Athens government, said Greece would be unable to escape its debt trap unless it devalued its currency to boost exports.
The only way for this to happen is for Greece to leave the euro. Until now, Greek politicians have played down the prospect of abandoning the euro, which some observers fear could set in motion the break-up of the single currency.
Speaking from Athens yesterday, Doug McWilliams, chief executive of CEBR, said: “The only option for Greece is both to exit the euro and to default.”
An alternative would be for Greece to extend the duration of its national debts for five years in an effort to avoid default.
The eurozone’s problems will be top of the agenda at a meeting of the G20 nations later this week. George Osborne, the chancellor, will use the meeting, in Busan, South Korea, to urge countries that have budget deficits to follow Britain’s example and take aggressive action to cut them. It will be seen as an abrupt shift in Britain’s position. Previously, Gordon Brown and Alistair Darling had used the G20 to push for continued fiscal stimulus to maintain the global recovery.
Osborne will say that delaying action to cut deficits will create greater danger. “Those countries that have big deficits need to tackle them urgently,” the Treasury said.
Spain’s main priority is reform of the cajas, non-profit regional lenders that are seen as the weak link in the stricken financial sector.
The Caja Madrid talks would see it form a joint banking group with Caixa Laietana, Caja Avila, Caja Segovia, Caja Insular de Canarias and Caja La Rioja. The smaller banks would retain some independence but combine central operations and benefit from a larger combined balance sheet and government bailout money.
Spain has the highest unemployment in Europe at 20% and a budget deficit that is 9.3% of GDP, similar to Greece.
The government last week passed by just one vote ¤15 billion of cuts, including a 5% across-the-board pay reduction for civil servants.
Meanwhile, forecasters are beginning to revise down their predictions for Britain’s budget deficit. The British Chambers of Commerce (BCC), in a forecast published today, predicts borrowing of £147 billion this year, falling to £116 billion in 2011-2, compared with Treasury forecasts of £163 billion and £131 billion.
Citigroup is even more optimistic, predicting a deficit of £132 billion this year and £90 billion next year.
“The government’s decision to adopt forceful measures to deal with the budget deficit will help to restore market confidence,” said David Kern of the BCC.
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