Greece must default, says former PM Sir John Major

Sir John Major
Image caption The former prime minister said the UK faced a "very, very serious" financial crisis

Former Prime Minister Sir John Major has told the BBC that European banks need to recapitalise and "Greece needs to default" on its debts, to help bring an end to the eurozone debt crisis.

He said it would be "catastrophic" if the country defaulted before the banks had enough money to cover their losses.

Sir John also backed the decision by the Bank of England last week to pump more money into the UK economy.

He said the UK faced a "very, very serious" financial crisis.

Last Thursday, the Bank announced it would begin a fresh round of quantitative easing by injecting another £75bn into the economy, having pumped £200bn in during its first round.

Strong banks

The former conservative PM said it was "desirable to get a Greek default out of the way".

A potential default was hanging over financial markets and was already expected by many investors, he said.

However, it was imperative that banks were strong enough to withstand any default, he added.

"If Greece defaulted and couldn't pay its debts, all the Greek bonds that are held in other banking systems across Western Europe would suddenly have no value," Sir John told the BBC's Andrew Marr Show.

"You could as a knock on effect create a banking crisis in Western Europe... so that would be absolutely catastrophic if that happened."

European leaders agreed proposals in July that included private lenders taking a hit in any Greek default. However, the cut of 21% proposed is now seen by many as insufficient, with reports suggesting leaders are now contemplating a 50% cut.

Sir John said Greece could default and remain in the eurozone. This could be achieved by granting the bloc's bailout fund - the European Financial Stability Facility (EFSF) - a banking licence.

It could then borrow money from the European Central Bank to either buy Greek government bonds or recapitalise European banks, he said.

Whatever the outcome of the debt crisis, Sir John said it was "extremely unlikely the eurozone would fracture".

He also highlighted the importance of the bloc to the UK, saying that 40% of UK exports went to the eurozone.

His comments come as French President Nicolas Sarkozy and German Chancellor Angela Merkel prepare to meet in Berlin to discuss the best way forward.