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EIU sees at least 40% risk of eurozone breaking up

(Xinhua)

16:13, August 22, 2011

SINGAPORE, Aug. 22 (Xinhua) -- The London-based Economist Intelligence Unit (EIU) now saw a chance of at least 40 percent for the eurozone to break up and an equal chance for the global economy to go into a recession, local daily Business Times reported on Monday.

Robert Bew, chief economist of the research unit of the Economist Group, said in an interview with the newspaper that the eurozone breakup would have "disastrous consequences" that would in themselves drive a global recession.

"Worse is we might get both together," he was quoted as saying.

The global markets have been going through a correction as investors turned cautious on the outlook of the U.S. economy and the risks of a sovereign debt crisis further spreading in the eurozone.

The EIU has just cut its forecasts of the U.S. economic growth for this year to 1.7 percent and the world growth to 2.5 percent, respectively.

However, the key issue is less about the forecasts, and more about the probabilities attached to the risks now.

"The biggest worry I have at the moment is around what's going on in Europe, and the implications of a breakup in the eurozone will be so significant in terms of global demand that the impact on Singapore and other markets in the region, including China, will be very marked," Bew said.

With Italy and Spain now vulnerable as well, the euro debt crisis has been elevated to "a new and much more dangerous level," the EIU believed.

"It's going to take time to build a political consensus around a long-term solution to these problems, and there's now a very high risk that Europe doesn't have that time," Bew said.

In any case, a breakup of the eurozone would immediately raise questions about the solvency of large parts of the global banking system, leading to a "second round of financial crisis, similar to the one that we saw in 2008," he said.

"While the risk is very high that the eurozone breaks up, because we see difficulties in governments reaching a consensus around strategy, it's not our central forecast because we also recognize that the consequences are so stark that governments will be prepared to do anything in order to avoid it," he said.

However, the EIU still believes that the risk is now higher.

"We have moved from a situation where everyone recognizes this would be very damaging but wholly believes that governments have the capability and the will to head it off, to recognizing that actually events may accelerate beyond their control," he said.

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