The euro's credibility will suffer if fiscal woes that are pounding Greece spread to bigger economies like Spain, says Goldman Sachs Chief Economist Jim O’Neill.
“If you start having serious problems credit wise with the likes of Spain, then the issue for the euro’s credibility and its pricing against other currencies becomes a much bigger issue,” O’Neill told Bloomberg.
“Obviously the euro appears to be already affected by this.”
Greek, Spanish and Dubai bond prices have taken a beating over the past month on concerns if those countries will be able to kick-start their economies that have taken a beating during the worst global recession since World War II.
Greek Prime Minister George Papandreou’s government is telling investors it can cut the country’s deficit from 12.7 percent of gross domestic product to below the European Union’s 3 percent limit by 2013.
“The markets have been talking about the Greek dilemma for the best part of two weeks and of course, this time of year we’re at, people are looking for a bit of a breather,” O’Neill said.
“It’s going to be a topic in the new year, that’s for sure.”
The larger Spanish economy will contract in 2010 by up to 0.6 percent.
"We would look for a deviation of 0.3 percentage points (on existing forecasts) for the year ahead, up or down. GDP in 2010, forecast at -0.3 percent, could range from zero to -0.6 percent,” says Economy Secretary Jose Manuel Campa, according to Reuters.
Meanwhile, the economic crises in Greece and Ireland may necessitate financial bailouts or even an exit from the euro for these countries, according to Standard Bank analyst Steve Barrow.
“Countries like Ireland and Greece may not be able to grow out of the current crisis,” Barrow, head of G-10 currency strategy for the bank, has told Bloomberg.
“With interest-rate cuts, exchange-rate depreciation and significant fiscal support all off limits for these countries, bailouts or even pullouts from EMU (European Monetary Union) may happen next year.”
EMU rules limit member countries’ interest rate moves, currency moves and budget deficits.
Ireland and Greece have suffered more from the financial crisis than their neighbors. Ireland’s real estate market collapsed, and its banking system is in tatters after taking on too much risk.
The Irish government estimates that its economy will shrink 7.5 percent this year and 1.25 percent next year.
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