Euro break-up would hit Malta – EIU

The fear of contagion is in the air, according to a report by the Economist Intelligence Unit, which has mentioned Malta as one of the likely victims of the eurozone crisis should Greece exit from the single European currency and prompt a domino effect.

According to the Economist Intelligence Unit's report, Malta "would probably leave" the eurozone in the wake of a catastrophic secession that would see the so called PIIGS - Portugal, Ireland, Italy and Spain - return to their national currencies.

The EIU concedes that there are too many unknowns to make confident predictions about the extent and speed of any break-up. "Firm predictions are tricky... But broadly a fracture between a strong northern 'core' and the weaker 'periphery' looks most likely."

It says there is a 60% chance that member states will "muddle through" in a bid to avert a catastrophic break-up. But it also predicts a 35% chance of a break-up, with the weaker economies taking Malta and Cyprus along with them:

"Malta would probably leave, and Cyprus would have little choice but to exit as its banking system would be nearly wiped out by a Greek collapse."

The EIU declares that its central forecast is that the currency area will survive. "But the odds of failure are too high to ignore."

Up to ten countries could remain members of the euro: Germany, France, Austria, Belgium, Finland, Luxembourg, the Netherlands, Slovakia, Slovenia and Estonia. The last three are small, open economies like Malta and Cyprus, but with healthier foundations at the heart of their economy, the EIU says.

The EIU says that if Greece leaves the euro, the market pressure on the most vulnerable of countries would become overwhelming.

"As the chain reaction spread across Europe, we think contagion would be rapid, dramatic and uncontrollable at times, but there might also be periods in which events moved slowly."

The eurozone has no formal mechanism for a member state to leave of its own will or even be expelled. If Greece unilaterally breaks off, it endangers its credit and political status.

The trigger would be Greece's refusal to take on the harsh terms for its bailout, or seeing the IMF and other member states leaving it to its own devices as it refuses to speed up deficit-cutting measures.

Without the cash injections from the European Central Bank, Greece's banking system would collapse, "making normal commercial life impossible. At this point, the only way to restart commercial activity could be to introduce a new national currency," the EIU says.

The EIU lists some unpleasant consequences for countries leaving the euro: a bank run would be likely, with deposits moving out of the country. Any debt in euros would be even higher with the new, depreciated currency. "Companies would become insolvent. External funding would also be cut off. Public-sector salaries and most private-sector salaries would have to be paid in the new currency. The country would suffer a sharp compression of imports, to the point where it could only import goods and services up to the value of hard currency it earned through exports."

It seems Italy would mitigate the damage thanks to its "well-established export-manufacturing base and reasonably sound economic fundamentals...  Greece, in contrast, lacks a strong industrial base and would have little in the way of a functioning economy to fall back on."

But according to Stephen King, chief economist at HSBC Holdings Plc in London, a break-up of the eurozone could threaten a repeat of the Great Depression. The ensuing banking crisis would mean the ECB would have little option but to inject a vast amount of cash and print money to buy "potentially unlimited quantities of bonds".