Rich countries must take coordinated action to prevent the
fiscal crisis in Greece and other advanced nations triggering a
global economic downturn, leading economists have warned.
A surge in eurozone interest rates could trigger a collapse
in asset prices and a slump in world trade, they warned.
Willem Buiter, chief economist of Citi, said that the global
advanced country sovereign debt problem extends way
beyond Greece and affects not just Europe but all
industrialised countries the US, UK, Japan.
While it is not as serious as Greece because
Greece is in a unique league of awfulness of its own the
fiscal situation of countries such as the UK, the US and Japan
is not certainly better than Spain and Portugal.
He said that rich countries must engage in a large
scale fiscal tightening. When I say large
scale I mean on a scale completely unmentioned by
politicians and completely beyond the world view of the great
We are going to be with a savagery that no politician
has really owned up to and the public at the moment does not
even what to hear about, he said.
He called for a fund to be set up to which EU member
states, and potentially other countries, would subscribe
between E1.5 and E2 trillion. You dont have to pay
it in, but you have the right to call it in as and when [a
crisis] emerges, he said.
Buiter spoke to Emerging Markets from Athens as the
Greek government prepared to announce a Eu120 billion rescue
package funded by the European Union and the IMF, and anti-cuts
protesters clashed with riot police in Athens.
Simon Johnson, a former IMF chief economist, said the
nightmare scenario for the eurozone would be a
surge in bond yields in major economies such as Spain and
As rates rise traditional investors in eurozone bonds
will refuse to take more. There will be no buyers in the market
and governments will not, he told Emerging
He said once that crisis took hold it would be too large for
the European Central Bank or the German government to solve.
The eurozone will be at risk of collapse, he
He estimated a bailout of the four weakest economies
Greece, Portugal, Spain and Italy could cost $1
The funds would need to come from the G20, and
extremely tough decisions over fiscal and monetary policy need
to be handled in a fair and reasonable manner.
If Europe does experience a double-dip recession this would
impact the world, Johnson said.
Barry Eichengreen, professor of economics at the University
of California, said in Tashkent yesterday that the Greek rescue
package is not a solution that is a holding
He told Emerging Markets that the sovereign
debt problems in the eurozone would impact Asia, because
Europe is as important as the US for Asian exports
but that the hit to exports will be nothing like
2008, and a run on the banking system such as that
experienced in the US in 2008 was not to be
Buiter said emerging markets need to take policy actions to
help alleviate the risk of a global downturn. The fiscal
consolidation in advanced countries should put downward
pressure on their real exchange rates vis a vis emerging
markets, he said.