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, 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.
As for Greece, Fitch Ratings cut its credit rating recently, and Standard & Poor indicated it may soon follow.
Greece is struggling with a massive debt burden. The economy contracted 1.7 percent in the third quarter from a year earlier, and the budget deficit totals 12.7 percent of GDP.
While the government has plans to cut the gap, many analysts are skeptical.
"The likely rise in public debt to more than 120 percent of GDP next year and further to 125 percent in 2011 would leave the public finances highly exposed to shocks," Fitch analysts wrote in a report.
Standard Bank’s Barrow told Bloomberg that the inability to make fiscal transfers within the 16-nation Euro region may do in the currency system.
He said the two countries’ woes will continue to drive the premiums of their bond yields over German bond yields higher.
“That can, in many ways, be a more destructive line of attack for the market than currency pressure,” Barrow says.
Irish and Greek officials deny they will leave the euro.
“This suggestion is an example of completely uninformed comment,” the Irish finance ministry said in a statement. “As the Minister for Finance stated nine months ago, it is akin to stating that Texas will leave the dollar.”
Greek Prime Minister George Papandreou told reporters, “There is no possibility of a default for Greece.” Hedge fund legend George Soros said the same thing in an interview with Sky Television.
But many experts remain concerned. "The Greek problem will be an acid test for the currency union," a senior German government official told German magazine Der Spiegel.
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