Tags: Mobius | Cyprus | euro | default

Mark Mobius: Default Only Answer for Eurozone

Thursday, 28 Mar 2013 01:20 PM

By Michael Kling

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Default is the only solution to the eurozone’s ongoing problems, according to banking expert Mark Mobius.

Bailouts have not worked, the executive chairman at Templeton Emerging Markets Group told CNBC.

“At the end of the day, you just have to have a default. The default will take place with a longer time period, in other words, they will stretch out payments so that at the end of the day, as the economies recover, they are gradually able to pay off these debts,” Mobius said.

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Devaluation of the euro will help countries repay their debts, he explained.

The euro’s value has fallen, but hasn’t been devalued yet. It should be weaker than it is now, he noted, saying the fact that people are buying and holding the currency is “amazing.”

Still, he predicts devaluation for the euro.

“You will see a deterioration of the euro against other currencies, particularly against emerging market currencies,” Mobius said. “When that happens then you are able to pay off all these debts.”

The initial proposal to tax bank deposits was “a crazy decision,” Mobius told CNBC. “This was a very, very bad decision which the quickly corrected,” he added.

“What happens is that savers in Spain, Italy, Portugal, and these other southern European countries begin to say ‘hey my savings are not going to be safe,’ and the savers are the people keeping these banks alive, they’ve got to keep those savers in the banks.”

Nobel Prize-winning economist Paul Krugman also criticized the Cyprus bailout. Some people wonder if leaving the euro would mean a default, but the small country might not avoid a default even if it remains in the euro, he wrote in his New York Times column.

The bailout deal will increase its debt to 140 percent of gross domestic product, about the same as Greece in 2010, he estimated. That will prompt a severe downturn, as well as deflation, that might be even worse than Greece’s depression.

“How is this supposed to work?” Krugman asked.

Keeping the nominal exchange rate fixed and using what’s called “internal devaluation” rather than real devaluation does not help make debt more manageable, he said.

“Either way, the real value of the debt gets blown up over time — more quickly via devaluation, to be sure,” Krugman wrote, “but that’s the flip side of making the necessary cost adjustment faster too.”

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