Greece may get a bailout, but its economic woes will eventually lead to default on its government debt, says Paul Donovan, deputy head of global economics for UBS.
For now, both the International Monetary Fund and euro zone nations will provide support for the beleaguered nation.
A bailout plan, hammered out late Thursday by euro zone nations, sets out a system to rescue Greece if it finds itself unable to borrow. It would provide individual loans from other euro zone countries and funding from the International Monetary Fund, the Associated Press reported. But it sets out strict conditions for activating the mechanism, saying it could only be used as a last resort, and requires unanimous agreement of all 16 countries that use the euro.
“The Germans are going to have stop whining and start signing checks sometime soon. The French will have to pay up as well,” Donovan told Bloomberg.
But that’s only a short-term fix for a nation whose budget deficit totaled 12.7 percent of GDP last year.
“Ultimately, Greece is going to default at some point. I think it’s in an impossible situation,” Donovan said.
“What we need to do is to keep things rolling over in the short term to minimize the contagion that comes from that. We don’t want a Greek default causing problems for Ireland or Spain.”
The risk is a wider financial crisis like the one that began in 1997 with a plunge by Thai baht.
It’s unlikely that Greece will leave the euro, because that would also mean an exit from the European Union too, Donovan says.
And that in turn would lead to financial collapse and social crisis.
Martin Taylor, former CEO of Barclays bank, says the best way out of the mess would be to split the euro.
“The least damaging solution now might be a north/south split of the currency,” he wrote in the Financial Times.
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