Veteran financier and former Citi executive Bill Rhodes warned last night that Ireland and Greece could be forced into debt restructurings – with far-reaching effects – if European leaders fail to move quickly to hammer out a more robust support plan for the bloc’s ailing members.
Rhodes, a former senior vice chairman at Citi, told Emerging Markets in a telephone interview that Europe faced a stark choice between vastly increased funding for peripheral Eurozone economies or the prospect of sovereign defaults.
“The interest rates that these countries – Greece, Ireland, Portugal – are having to pay on their debt are unsustainable,” he said. “You’ve got to either give these countries the proper finance on longer maturities than what’s been given, with lower interest rates – or you have to pour in massive amounts of money, something like a Marshall Plan.”
He added that the alternative was that “you’re going to end up in some sort of restructuring, like we saw in the 1980s [...]. You can’t keep kicking the can down the road.”
His comments came as European leaders yesterday struck an inconclusive deal to tackle the eurozone debt crisis, at the end of a two day-summit in Brussels which had been overshadowed by the collapse of Portugal’s government.
EU leaders agreed to give the eurozone’s E440 billion bail-out fund more muscle, pledging to up its lending capacity to its full amount. Currently it can only lend E250 billion. But governments failed to agree on the details of how new lending limits would be reached.
Attention could now shift to Spain, whose state finances have also come under heavy scrutiny. Contagion to Spain could trigger a sharp sell-off of the euro and have profound implications for global markets, analysts have warned.
Rhodes said that Spain was not in any imminent danger, but that authorities must move fast to shore up recent reforms.
“Spain needs to continue with its austerity measures and at the same time move as rapidly as possible on the Caixas [local savings banks] to get them merged and cleaned up and recapitalized as soon as possible.”
But he said that the threat of contagion in financial markets should not be overlooked.
“We live in a world of contagion, economically and politically,” he said. “Contagion is a reality that people continue to underestimate both in economic and political terms. Never underestimate the speed of markets or how they respond.”
Rhodes, who was speaking ahead of the launch of his book Banker to the World, added that a breakup of the eurozone was unlikely. “It’ll hold together because it’s too valuable historically, politically and economically to allow [a break up] to happen.”
Portuguese and Irish bond yields soared to a euro-era high on Friday on the increasing likelihood that Lisbon will require an international bail-out. But core European currency, debt and equity markets remained largely unaffected, with economists suggesting that markets had largely priced in the need for a Portuguese bailout.
The tremors may serve as a wake-up call for authorities in other regions, including Latin America, who analysts say are guilty of complacency over the unfolding Eurozone sovereign debt crisis for many months now.