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Greek Euro Exit Would Risk Asia Crisis-Style Rout, Zeti Says

Malaysia’s Central Bank Governor Zeti Akhtar Aziz
Zeti Akhtar Aziz, governor of Bank Negara Malaysia, said measures to prevent a Greek departure from the common currency should also be accompanied by a plan to boost growth in the region. Photographer: Dimas Ardian/Bloomberg

A Greek exit from the euro could cause contagion comparable to the Asian financial crisis, according to Malaysia’s central bank Governor Zeti Akhtar Aziz, who had first-hand experience of that turmoil.

“The worst-case scenario is what we saw in Asia,” Zeti, 64, said in an interview with Bloomberg Television in Istanbul yesterday. “When one economy collapses, then the market usually moves on to focus on the next one, then there will be a contagion that will affect different countries that probably don’t deserve those kinds of consequences.”

European leaders are now openly talking about a possible Greek euro exit after attempts to form a ruling coalition in Athens broke down on May 15. The debt crisis in the region sent Spain’s 10-year bond to a five-month high of 6.5 percent yesterday and Italy’s 10-year bond yield rose to as much as 6 percent, the highest since Jan. 30.

“The consequences for that to happen I believe will be unimaginable for Europe, therefore a solution has to be found to address the situation,” Zeti said. “I believe that such a solution can be found.”

Zeti was assistant central bank governor responsible for economics, reserves management, money market and foreign exchange operations when Thailand devalued the baht on July 2, 1997. The ringgit fell 89 percent in the next six months as regional currencies plunged and investors fled the region, pushing Asian economies into recession and prompting Thailand, Indonesia and South Korea to turn to International Monetary Fund bailouts. It was Zeti who announced Malaysia’s capital controls in 1998 as acting governor, drawing the ire of the IMF.

First Woman

Zeti, the first Malaysian woman to become central bank governor, obtained a doctorate in economics from the University of Pennsylvania in 1978, with a thesis focusing on international capital flows and its implications for macroeconomic policies.

Malaysia will stick to its official economic forecast for a 4 percent to 5 percent expansion this year as it has already priced in prospects of “significantly” lower export growth, the governor said. Inflation in Malaysia is moderating and the only risk is commodity prices, she said.

Interest rates aren’t restricting borrowing activities and are supporting overall growth, Zeti said. “At this point in time, I believe that unless inflation does begin to again rise, it does not merit consideration of raising rates.”

Bank Negara Malaysia kept the benchmark overnight policy rate unchanged at 3 percent for a sixth straight meeting on May 11. The country joined Indonesia and South Korea in holding borrowing costs steady this month to bolster growth as Europe’s sovereign-debt crisis threatens to escalate.

Boosting Growth

Measures to prevent a Greek departure from the common currency should also be accompanied by a plan to boost growth in the region, Zeti said. “Structural adjustments” being imposed in Greece and on other economies such as fiscal austerity need to be done gradually, she said.

Malaysia is increasing spending on roads and railways to sustain growth of as much as 5 percent this year, ahead of a nationwide election that must be held by early 2013. Prime Minister Najib Razak has also raised civil-servant salaries and pensions, waived school fees and boosted handouts for the poor.

The $238 billion economy expanded 5.2 percent in the fourth quarter from a year earlier, slowing from a 5.8 percent pace in the previous three months. Bank Negara is due to release first-quarter gross domestic product data on May 23.

Signs of weakening demand for Asian goods have emerged, with Malaysia, Thailand and the Philippines all reporting export declines. Malaysia’s overseas sales unexpectedly fell in March as manufacturers such as Unisem (M) Bhd. and Malaysian Pacific Industries Bhd. shipped fewer electrical and electronics products, bolstering the case for the central bank to hold off from interest-rate increases.

The central bank predicted in March inflation may slow to a range of 2.5 percent to 3 percent this year from 3.2 percent in 2011. Price gains are easing and growth is within expectations, Zeti said May 2, adding that policy makers shouldn’t rush to tighten their monetary stance.

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