Citigroup’s Buiter says euro exit would be ‘suicidal’

Dara Doyle

January 11 2010 10:34 AM

Citigroup chief economist Willem Buiter said it would be "suicidal" for a "weaker country" to exit the euro region as they would also have to leave the European Union.

“The only risk to the euro zone is not from our weaker brothers and sisters -- it’s the stronger countries, Germany, saying, ‘I am fed up having to face the risk of bailing out the weaker’,” Buiter said in an interview in Dublin today.

Downgrades to Greece’s debt late last year renewed concern that some countries may struggle to pay their bills.

The Greek budget deficit widened to 12.7pc of gross domestic product in 2009, more than four times the European Union limit.

The average euro-area deficit will widen to 6.9pc of GDP this year, the European Commission estimates. Buiter said there’s a “non-negligible risk” that a euro-area country may “restructure its debt,” with a 5pc chance that Greece will seek to renegotiate its loans.

“The chance of Ireland defaulting is effectively nil because they have taken the right measures,” he said, referring to spending-cut plans announced by the Government. “Greece isn’t there yet.”

The premium investors demand to hold Greek bonds instead of German bunds has widened to 215 basis points from 30 points two years ago. The spreads of their Spanish and Irish counterparts over German debt are at least three times what they were in January 2008.

Buiter said he doesn’t see “any threat of inflation” in the 16-nation euro region and doesn’t expect the European Central Bank (ECB) to raise interest rates this year.

The Bank of England may “start tinkering” in the middle of 2010 and increase its benchmark rate to between 0.75pc and 1pc by the end of the year from 0.5 percent currently.