Feb. 28 (Bloomberg) -- Nobel-prize winning economist Paul Krugman said Greece is “close” to having to leave the 17-member currency region as austerity measures imposed on the nation hamper its economic recovery.
“If I were running a peripheral country I would say that you cannot leave” the euro region, Krugman, a professor at Princeton University, said in Lisbon late yesterday. While it would be “extremely disruptive,” Greece is “very close to running out of alternatives,” he said.
Germany’s parliament approved a second Greek aid package in Berlin yesterday, part of a plan agreed earlier this month to stem the debt crisis. Still, finance officials from the Group of 20 nations meeting in Mexico over the weekend rebuffed pleas for additional funding through the International Monetary Fund, saying the region first needs to boost its own resources. European leaders are scheduled to meet in Brussels March 1-2.
Greece’s credit ratings were cut to “Selective Default” by Standard & Poor’s yesterday. S&P dropped Greece’s rating from CC, two levels above default, after the government added clauses to its debt designed to mop up investors unwilling to take part in a bond exchange, according to the statement.
The downgrade follows a reduction last week by Fitch Ratings to C, while Moody’s Investors Service has said it will cut the nation to its lowest rating.
Greece negotiated the biggest debt restructuring in history as it seeks to reduce national debt to 120 percent of gross domestic product by 2020 from 160 percent last year, and to meet the terms of a 130 billion-euro ($170 billion) international bailout. An agreed debt swap, known as private-sector involvement, will slice 100 billion euros off more than 200 billion euros of privately held debt if all investors participate.
Krugman also said that Portugal, which along with Ireland and Greece has received an international bailout, is not at the same stage as Greece and “with luck it never will be.” Still, it’s “hard to believe” the country will return to bond markets in 2013, he said.
It’s a “highly implausible proposition,” Krugman said. “What will have happened in 19 months? The major events that will certainly have happened are a European recession and an outright undisguised Greek default and possibly a Greek exit from the euro. And none of these are going to make it easier for Portugal.”
Krugman said that euro membership has turned out to be “unfortunate,” exposing peripheral economies to “extreme risk with no easy way out.” The Nobel-prize laureate said tougher budget cuts won’t help these countries as “some austerity is necessary but calls for ever more austerity are very disruptive.”
“It may be that in the end, there might come a decision that the euro was a mistake,” Krugman said. “That’s going to be difficult for anyone to acknowledge” and should come in a time of crisis for Europe but it’s a “very real possibility.”
Asked about Chinese aid for Europe, Krugman said that it’s not needed as the resources to solve the debt turmoil are “all here in Europe.” U.S. Treasury Secretary Timothy F. Geithner said in a Feb. 25 speech in Mexico that the region needs to make its crisis-fighting commitments “credible.”
German Chancellor Angela Merkel said yesterday that there’s “no need now for a debate on increasing the capacity” of the euro-area’s temporary and permanent bailout funds, citing lower bond yields for Italy and Spain.
She said euro leaders will discuss this week moving up capital payments for the permanent fund, the European Stability Mechanism, and that Germany is willing to pay in 11 billion euros this year if other countries speed up payments as well.
To contact the reporter on this story: Anabela Reis in Lisbon at firstname.lastname@example.org
To contact the editor responsible for this story: Matthew Brockett at email@example.com