Tags: Nobel | Economist | Spence | Greece | Default | Debt

Nobel Economist Spence: Greece Can't Avoid Defaulting on its Debts

Thursday, 23 Jun 2011 08:37 AM

The Greek government may have survived a confidence vote and will work to carry out austerity measures designed to improve its economy, but sooner or later, it will default on its debts, says Nobel economist Michael Spence.

"Greece is in a hole that they cannot dig out of," Spence tells CNBC.

The country is carrying too much debt and its economy lacks the competitiveness to fuel enough growth that could take the economy out of that hole and generate income to pay down creditors, Spence says.

Abandoning the euro would one path for the country to take.

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Michael Spence
(Getty Images photo)
"A devaluation is the normal way to handle it. It makes the country poorer, of course, because they import a lot but it restores the competitiveness."

A devaluation instantly cheapens a country's exports, making them more attractive overseas.

In the meantime, Greece must endure tough austerity measures, including job cuts and selling off state assets, which may prove to be too bitter of a medicine to swallow as authorities work out the problem.

"But I have to say it looks now as if the kind of austerity that will be required of a country like Greece by, say Germany, may be more than what the Greeks are willing to tolerate," Spence says.

"At some point, they'll say enough, so I think there is a real risk to the eurozone."

Other experts point out that a Greek default will rattle global markets.

"If Greece were to default, I think the idea that you could contain that would be fanciful," former British finance minister Alistair Darling tells CNN.

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The Greek government may have survived a confidence vote and will work to carry out austerity measures designed to improve its economy, but sooner or later, it will default on its debts, says Nobel economist Michael Spence. Greece is in a hole that they cannot dig out of,...
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Thursday, 23 Jun 2011 08:37 AM
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