May 26 (Bloomberg) -- Greece will probably be unable to meet its obligations as the euro region’s most-indebted nation is insolvent, according to former European Central Bank Chief Economist Otmar Issing.
While it is “not physically impossible” for Greece to honor its obligations, repayment is unlikely, Issing, 75, said at a press conference hosted by Nykredit A/S in Copenhagen today. The region’s debt crisis, which has also forced Ireland and Portugal to seek bailouts, has left the euro in a “critical” condition, Issing said.
“I’m skeptical about Greece,” said Issing, who joined the ECB a year before the euro’s inception in 1999 and stayed there until 2006. “Greece is not just illiquid, it’s insolvent.”
The Greek government this week endorsed an accelerated asset-sale plan and a package of budget cuts in an effort to meet requirements for a fifth tranche under its bailout accords with the European Union, the Washington-based International Monetary Fund and the ECB. That may not be enough to quell speculation the country will be forced to restructure its debts, according to economists including Nobel laureate Paul Krugman.
“It’s basically inconceivable that there won’t be some significant losses on present value for bondholders” of Greek, Portuguese and Irish debt, Krugman, 58, said at the same press conference today. While “Spain may be able to tough it out,” it’s “extremely” unlikely Greece will be able to honor its debts, he said.
“I would put 50 percent odds on Greece being booted out of the euro, not so much through deliberate policy as through contingency of events,” Krugman said. The country may face a banking crisis, exacerbated by the ECB’s refusal to “maintain” loans to the country’s banks, he said. That could lead to a Greek exit from the euro, he said.
The euro traded at 1.4184 per dollar at 1:39 p.m. in London, paring gains after having traded as high as 1.4196.
There’s a 1 percent risk of a “domino effect” where other countries, including Spain and Italy, would have to follow Greece out of the euro area, Krugman said, calling it “the nightmare scenario.”
The cost to insure Greek debt against default rose to a record this week and the yield on the nation’s 2-year and 10-year debt climbed the most since the euro’s 1999 introduction.
“By any reasonable estimate, the euro-zone isn’t an optimal currency area,” said Krugman. Europe lacks “very high labor mobility,” and “fiscal integration,” which are criteria needed for a joint currency, he said.
According to Issing, who said he was “never euro-phoric” and was among economists in Germany “warning against premature entry into the monetary union and against too many countries,” the currency union can’t be allowed to fail.
“Once it has started, it must not fail,” he said. “It would be a political and economic disaster.”
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