Euro zone will break up, Prasarn predicts
Central bank chief believes strong economies will distance themselves from common currency
Bank of Thailand Governor Prasarn Trairatvorakul envisions the eventual break-up of the euro zone.
Much depends on the euro economies’ commitment to the handling of their structural problems and agreement to amend the Maastricht Treaty to embrace fiscal and labour integration, which are the kingpins of monetary integration.
The United States went through this crisis over 200 years ago when its currency, the dollar, was first conceived. To ensure that the dollar was the only currency in the country, the US needed fiscal integration of all states.
“The [euro] integration took off on the wrong foot, with only integration on the monetary issue and without integration in the fiscal and labour issues,” he said last week.
While some European leaders are busy with getting pressure off the currency, soon they would have to deal with the more serious issues – over fiscal integration.
“The plane is in mid-air. Turning off the four engines now would lead to a hard landing [for the entire zone]. Now, the issue at hand is to ensure that the plane first lands safely. Then, the engines can be turned off one by one,” he said.
His message is that when the time comes, strong economies would distance themselves from the single currency. Meanwhile, weaker economies like Greece are looking for an exit, as that would pave the way for devaluation of their own currencies and a boost to their competitiveness. That is the crucial part in spurring economic growth and reducing public debt.
That explains why European leaders and the International Monetary Fund last week approved the second bail-out package worth 130 billion euro (Bt5.3 trillion) to Greece. That would buy some time for Greece.
Still, risks persist, particularly for European financial institutions that hold Greek paper. Last week, they agreed to a 53.5-per-cent haircut for debts owed by Greece.
Prasarn showed concerns over the period that the banks can sustain the burden. Should they want to unload the burden to others, they would need to offer a steeper discount. Eventually, the discount could be as deep as 70 per cent. Though the measures would help lower Greece’s public debt from 160 per cent of GDP now to 120 per cent in 2020, the question is how would Greece deal with the remaining public debt, as Europe is now in recession.
The European Commission last week projected the regional economy contracting 0.3 per cent this year.
In return for financial assistance, Greece is required to impose austerity measures, including a 22-per-cent cut in the minimum wage. While individuals’ incomes are threatened, unemployment is expected to remain high.
At the symposium to mark the Government Pension Fund’s 15th anniversary last Friday, Binay Chandgothia, managing director of Hong Kong-based Principal Global Group, said Europe has to deal with structural challenges, as several countries in the region are not competitive.
The currency risk would spread to other countries, as due to parity, uncompetitive countries are not supposed to be equalised with competitive countries.
Investors now need to focus more on the fundamentals of a particular country, not the entire region.
European leaders, “if pushed to the wall, would take actions for medium-term results”. But later, they need to do more, particularly to get a cut in the primary budget, he said.
Surojit Ghosh, vice chairman of Hong Kong-based Credit Suisse, said it has been known for some time that Greece could not be compared to Germany, given that it is extremely rigged by fraud. Italy and Spain are also better off, given their trade surpluses. Still, if Greece defaults on its debt now, the contagion risks would increase.
John Masrland, fund manager of Schroders in Singapore, said a default now would hurt the banking industry and the bail-out package provides time for banks to get ready for tough times.
Lori Whiting, vice president of US-based Wellington Management, said that given the huge public debt in the region, which is over 150 per cent of GDP, it would take 10 years for deleveraging.
With the poor regional outlook, Prasarn now fears that Greece’s problems may stretch to other euro-zone economies.
Prasarn, who lists the euro-zone crisis as the most important threat to the Thai economy, said Thailand is not immune to the crisis. But the degree would become more apparent after the elections in several countries in Europe, including France and Italy. Then, the political will on handling the crisis would become clear.
