Greece Will Probably Leave Euro Within Six Months, Borg Says

By Johan Carlstrom and Josiane Kremer on October 13, 2012

As European Union leaders prepare for a summit next week devoted to saving the euro, Swedish Finance Minister Anders Borg said Greece may quit the common currency within the next six months.

“It’s most probable that they will leave,” Borg said today on a conference call from Tokyo, where global finance officials have gathered for the annual meetings of the International Monetary Fund. “We shouldn’t rule out this happening in the next half-year.”

Borg’s warning comes a day after the EU was awarded the Nobel Peace Prize amid a financial crisis now in its third year and four days after German Chancellor Angela Merkel encountered rioters and anti-Nazi taunts on a trip to Athens. Merkel said she wants Greece to remain in the euro.

The so-called troika that oversees euro-area bailouts, comprised of officials from the European Commission, European Central Bank and IMF, has resumed talks with Greek officials after a pause that provided Prime Minister Antonis Samaras’s three-party coalition with backing to continue efforts to carve out 13.5 billion euros ($17.5 billion) of new budget cuts needed to unlock aid payments.

EU leaders meet in Brussels Oct. 18-19 to discuss their efforts to make the ECB Europe’s chief bank supervisor and plans to tighten economic and monetary ties within the bloc.

Aid Payment

Euro-area finance ministers on Oct. 8 saluted Greece’s determination to trim its budget and reshape its economy, while demanding that the government in Athens commit to a list of 89 policy steps before the summit and leaving open whether the next 31 billion-euro aid installment will be paid out in one go or dribbled out in smaller pieces.

Borg said a Greek euro exit probably wouldn’t have a major impact on the financial system, “since in practice everyone already understands which way the wind is blowing.”

Given Greece’s lack of competitive industry and inability to implement necessary reforms, “it’s a little bit hard to see how they’ll resolve this situation without stimulating competitiveness through a significantly lower exchange rate,” Borg said.

Borg has long been pessimistic about Greece’s future. In July, he said “some sort of default” was the most likely scenario for Greece. Last month, he said he couldn’t rule out a Greek euro exit within a year and that European banks were prepared for such an outcome.

‘Political Strength’

Citigroup’s Juergen Michels said in a note to clients yesterday that the likelihood of Greece quitting the euro in the next 12 to 18 months has dropped to 60 percent from 90 percent. He cited a change in attitude among core euro-area states.

Many investors “are betting that we won’t have the political strength” to defend the euro, Merkel said today in a speech to a regional convention of her Christian Democratic Union party held at Celle in the northern state of Lower Saxony. “I am determined to make the effort, even if it’s hard.”

The IMF said failure to sort out the European debt crisis was contributing to an “alarmingly high” risk of a steeper slowdown in the world economy, already on course to expand this year by the least since the 2009 recession.

Borg today also renewed his opposition to the current proposal for common European bank supervision.

EU leaders in June embarked on plans to build a common supervisor as a step toward offering direct bank bailouts from the euro-area’s firewall fund. All 27 EU nations must approve the oversight proposal for it to move forward. Non-euro nations including Sweden have called for assurance their voices won’t be drowned out.

“The signal I’m getting from the other European countries and also from the ECB is that they see these problems and really want to find solutions,” Borg said. All countries should “participate on the same terms with the same influence.”

To contact the reporters on this story: Johan Carlstrom in Stockholm at jcarlstrom@bloomberg.net; Josiane Kremer in Oslo at jkremer4@bloomberg.net

To contact the editor responsible for this story: Jonas Bergman in Oslo at jbergman@bloomberg.net