Global Policy Forum

Euro Economists Expect Greek Default, BBC Survey Finds

A Greek sovereign default is likely, which will have dramatic effects on the viability of the Euro.  Economists have voiced their concern over the sustainability of European governments’ debt, even as they enact unpopular debt reduction measures.  Almost a year has passed since the first rumblings of the debt crisis and there are no signs that it will be going away anytime soon.

By Andrew Walker

BBC News
March 28, 2011

Greece is likely to default on its sovereign debt, according to the majority of respondents to a BBC World Service survey of European economists.

Two-thirds of respondents predicted a default. However, most thought the euro would survive in its current form.

The euro crisis began when it became clear that Greece would struggle to pay its debts and had to be given rescue loans by the EU and the IMF last year.

The BBC approached 52 professional economic forecasters for their views.

Since the Greek rescue, the Irish Republic has also had to seek help. And Portugal seems increasingly close to meeting the same fate.

The forecasters the BBC surveyed are experts on the euro area - they are surveyed every three months by the European Central Bank (ECB) - and as well placed as anyone to peer into a rather murky crystal ball and say how they think the crisis might play out.

The survey had a total of 38 replies and two messages came across very strongly.

Default expected

Most expect there will be a default by at least one government, but despite that, they think the eurozone will remain in one piece.

Nearly two-thirds of respondents - 25 out of 38 - said there would be a default.

All of them said Greece would probably fail to pay all its debts. Gabriel Stein of Lombard Street Research in London was one of them.

"Greece is bust, essentially. It will default because there is no way it can fulfill the fiscal and growth targets necessary to not default and make the debt sustainable," he said.

More than a third - 14 - said the Irish Republic would do so as well. Seven of them, including Gabriel Stein, predicted a default by Portugal.

However, Massimiliano Marcellino, head of the Economics Department at the European University Institute in Florence, said there would be no defaults.

"The countries in the worst conditions are sufficiently small to be rescued and there seems to be sufficient political support for that," he said.

"Whether this is a good idea or not is a different issue.

"It would be better to allow defaults but this is not the right moment politically and economically to discuss a default clause".

Greece, the Irish Republic and Portugal are small economies, as Mr Marcellino says.

However, there are concerns in the financial markets about a few other countries too.

Some forecasters expected defaults from large economies that would strain the EU's resources and its political commitment to the eurozone's stability: two said Italy and one of them said Spain as well.

So the dominant view among the forecasters we heard from is that Greece will default and there is a sizeable minority who expect more.

Euro survival

In answer to the question "Can the euro survive intact?", 33 of the 38 said it could.

Didier Duret, chief investment officer at ABN Amro private banking, says the eurozone will not break up.

"It's simply that the costs - indirect and direct - are just too big, in a pure quantitative assessment. But if we also include all the political fallout, it would have huge historical implication to the balance of Europe and we will abandon the geopolitical safe haven that Europe represents," he said.

There were a handful, though, who dispute that view, including Heikki Taimio of the Labour Institute of Economic Research in Helsinki.

"There will be increasing divergence between the north and the south. Some countries in the north will, at some point in the not too distant future, no longer tolerate this," Mr Taimio said.

"That would mean expulsion for some countries in the south. Before this happens, we shall see all kinds of efforts to keep the members together."

Crisis response

Most - 23 of the 38 - thought the handling of the crisis by the ECB and the European Commission had been satisfactory or better.

The role of these bodies has been central.

The Commission has been co-ordinating the political response by the member states, who have given the rescues financial backing.

The ECB added another dimension by going into the financial markets and buying the debts of governments in difficulty. It has also lent funds to banks that might otherwise have gone under, further aggravating the strains in the eurozone.

The bail-outs and the ECB's intervention have their critics. But most of the experts we surveyed thought they had performed reasonably.

So this is the big picture that emerges from a group of people whose views the ECB thinks it worth testing on a regular basis: the eurozone has some more stressful times ahead, including at least one probable default, but it will survive intact.


FAIR USE NOTICE: This page contains copyrighted material the use of which has not been specifically authorized by the copyright owner. Global Policy Forum distributes this material without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. We believe this constitutes a fair use of any such copyrighted material as provided for in 17 U.S.C § 107. If you wish to use copyrighted material from this site for purposes of your own that go beyond fair use, you must obtain permission from the copyright owner.