Monday, March 29, 2010

UBS: Agreement on Greece is Very Bad News for Euro; Greece Needs Another 16B to 25B Euros Soon

In an interview with Agencia Estado, Paul Donovan, global economist at UBS, warned that the there is a significant risk of Greek default on sovereign debt on a horizon of four to five years,.

The analyst argues that the Greek economy is inefficient, is not competitive, which will represent "huge challenges" to the country in four or five years when a new default risk may emerge.

According to the economist, the agreement tailored for the European Union and the International Monetary Fund (IMF) is good news in the short term. "But it's bad news for the euro in the long term."

In the short term, he argued that the agreement broke a deadlock and provided an immediate solution. In the long term, however, he states that Europe was unable to resolve the issue and had to seek help outside the regional union.

"If you need to seek outside help for a problem as small as Greece, which, frankly, is a very small in comparison to the scale of the European economy, it raises concern, in my view,".

Donovan said, however, that Greece is a "small problem" for the European Union. For him, the big problem is that monetary union does not work from an economic standpoint. The analyst argued that the European Monetary Union "does not work economically. It's not a good economy and needs to be reformed in the medium term."

He cited three points needed for a better functioning of the EU economically:

  • First, a fiscal union is necessary, so that the fastest growing economies can transfer revenues from tax collections for those which grow less.
  • There is a need for increased flexibility and mobility.
  • Wages should be adjusted to provide more competition for the savings they need and allow greater mobility for the unemployed search for jobs in other countries in the union.
On the issue of €5 billion in securities priced in Greece today, the UBS economist called the operation 'satisfactory', but has warned it will need to capture power again to honor its debt maturity in April and May.

"There are various estimates about how much they will need, but the amount of debt that is due is between €16 billion and €25 billion."

Also in relation to sovereign debt, Donovan held that there is no logical reason why the United Kingdom will have its credit risk is lowered. "There is no reason why a country that has a stable political system and is able to print its own currency should be something that is not AAA,"he said. The whole purpose of credit rating, "is to assess whether the lender will get the money back after all,".

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