Mundell Says Spain, Portugal, Ireland May Restructure

Mundell Says Spain, Portugal, Ireland May Restructure (Update1)

By Sara Eisen and Emma Ross-Thomas

July 12 (Bloomberg) -- Spain, Portugal and Ireland face a 20 percent risk of having to restructure their public debt while the likelihood is 40 percent for Greece and 10 percent for Italy, Nobel Prize-winning economist Robert Mundell said.

“I don’t think it’s going to happen immediately, but it might come in the next year or so,” Mundell, a Columbia University professor who won the Nobel Prize in 1999 for research that helped lay the foundation for Europe’s single currency, said in an interview with Bloomberg Television in Siena, Italy, yesterday. “I suppose the risk countries include Portugal, Ireland and Spain.”

European governments are fighting to rein in their budget deficits and stem a surge in borrowing costs prompted by contagion from Greece’s sovereign-debt crisis. Greece’s public debt amounted to 115 percent of its economic output last year, compared with 53 percent for Spain, which is struggling to put its public finances in order amid a 20 percent unemployment rate and one of the highest private debt burdens in the euro region.

The extra yield investors demand to hold Spanish 10-year debt rather than German equivalents surged to a euro-era high of 233 basis points on June 17, 10 times the average spread over the last decade, before easing to 209 basis points today. The risk premium on Greek debt is 768 basis points.

Worst Over

Still, Mundell said the worst may be over for Europe, supporting the euro currency.

“We’ve heard most of the bad news about Europe, not all of it, but most of it, and for that reason the euro-dollar rate is in more stable permanent territory than otherwise,” he said.

The euro fell almost 20 percent in the six months to June 7, when it traded at a four-year low of $1.1877 to the dollar. The single currency has since regained ground to trade at $1.2575 as of 2:45 p.m. today.

“I was glad to see the euro come back to the $1.20, $1.25, $1.30 range,” Mundell said. “This is a much better range for it because going down to $1.18 is exaggerating the risks to the euro.”

Investors betting on a euro breakup “are going to lose their money,” he said. “And I think also those people who were betting on the price of gold going up to $2,000 an ounce are going to lose their money, too.”