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    Default Greece may make an exit from euro, says leading economist Michael Bordo

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    Even as the debt crisis in Europe is temporarily on hold, there is a possibility of Greece making an exit from euro, a leading economist said on Friday.

    "The Euro area is still struggling. The Greek crisis may be temporarily on hold, with structured default that has been concluded.

    "(But) forced austerity in that country and a political backlash may end in a real disorderly default in the not too distant future and a possible exit from the euro," Michael Bordo, Professor of Economics and Director, Centre for Monetary and Financial History at Rutgers University in New Jersey, said.

    He was speaking at the 14th Annual Conference on Money and Finance organised by Indira Gandhi Institute of Development Research.

    Portugal may follow with a structured default, Bordo said, adding that the crisis for the rest of the euro area was being temporarily alleviated by generous ECB liquidity to the banks, some bank recapitalisation and moving toward moderate structural reforms.

    Reserve Bank of India Deputy Governor Subir Gokarn, who was also present at the event, in his speech emphasised on the need for fiscal prudence at both the state and the national level and observed that presently the market perceives that the state debt is backed by the sovereign.

    "The debt of the state governments is implicitly guaranteed by

    the sovereign. So with or without a formal guarantee, market perceives that state debt has been fully backed by sovereign. States with weak fiscal consolidation don't pay much premium compared to states with strong fiscal conditions," Gokarn said.

    The important thing in this year's budget is the commitment to return to rule-based approach. The current macro-economy is much threatened by fiscal expansion, Gokarn said.



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