Harvard economist Martin Feldstein — who 20 years ago warned that the euro would prove an “economic liability” — says Greece will default on its bonds and other euro zone nations may follow.
“Greece is going to default despite all the talk, despite the liquidity package,” Feldstein says, adding that Feldstein said other members of the 16-nation euro area may also default, with Portugal the main candidate.
Standard & Poor’s this week downgraded Portugal and Spain as well as Greece.
“Other countries may be able to do better dealing with their fiscal problems,” Feldstein notes. “Portugal is going to have a very hard time doing that.”
Feldstein points out that Greece will have to cut its budget deficit from 13.6 percent of gross domestic product last year, forcing its economy deeper into recession and sapping tax revenues.
“Those are enormous cuts, impossible to live with,” he told Bloomberg.
Feldstein believes the euro is now undervalued as investors focus on the Greek crisis.
He also fears that the U.S.’s debt could “easily” pass 100 percent of GDP and has urged President Barack Obama to cut non-defense discretionary spending and restrain tax cuts.
As Greece barreled closer to the edge of a debt default this week, fears that the crisis would infect other countries rattled the world's financial markets, Fortune reports.
"It's not a question of the danger of contagion," says Angel Gurria, the head of the Organization for Economic Cooperation.
"Contagion has already happened. This is like Ebola."
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