Greece needs to sharply increase interest rates, force a brutal adjustment in its consumption and stop deposit flight, else there is a 50 percent possibility it will exit the eurozone, a senior economics expert has told Xinhua.

"The interest rate in Greece is too low, and therefore people spend too much and park their money abroad. This cannot continue," Daniel Gros, director of the Center for European Policy Studies (CEPS), said in an exclusive interview.

EXCESSIVE CONSUMPTION, DEPOSIT FLIGHT

To avoid a messy default and potential exit from the eurozone, Greek citizens have to lower their consumption by about 20 percent, Gros estimated.

The Greeks have already reduced their consumption by about 10 percent, and many in the country think it is impossible to sacrifice more, "but nobody has told them it's only one half" of what is required, he stated.

Due to low interest rates, however, neither debt reduction nor austerity measures can help Greece reduce its account deficit, which currently stands at about 10 percent of GDP.

At present, Greek households and enterprises can easily borrow money from banks. Greek banks pay depositors an interest of 2.8 percent, which is higher than at a German bank, but "the difference is too small to make difference," said Gros. The cost of borrowing, at about 6 percent, is also too low to curb consumption, he added.

As Greece has become accustomed to consuming above its means, only a "brutal" adjustment can return its current account to surplus.

Something drastic must be done before the country can regain access to financial markets, Gros said. For example, Estonia had an even larger current account deficit before the financial crisis. When borrowing costs for new loans shot up over 40 percent, excess consumption was adjusted and the current account quickly turned into a surplus.

To concerns that higher interest rates can drag down the economy, Gros said, "the economy has to go down so that the current account deficit disappears."

With low interest rates, deposit flight poses another big threat to the survival of the Greek banking system and its economy, Gros warned.

Greek depositors are increasingly withdrawing cash from Greek banks and transferring the money abroad. Latest figures from the Greek central bank showed bank deposits by Greek businesses and households fell 3 percent in January, continuing last year's steady decline.

Last year, deposits shrank by 16.8 percent, or 35.37 billion euros (46.2 billion U.S. dollars), accounting for more than 15 percent of the Greek GDP. According to Gros, some 50 billion euros -- equivalent to a whopping 25 percent of GDP -- has been transferred away from Greek banks in the past two years.

"Interest rates must therefore be substantially increased to induce Greek savers to keep their deposits and stop the haemorrhaging of the Greek banking system," he said.

EUROPEAN CENTRAL BANK IN A QUANDARY

Gros attributed low interest rates in Greece to the cheap credit from the European Central Bank (ECB) which has been providing loans to the Greek banks at very low rates, at between 1 and 3 percent.

As long as this flow of cheap money continues, so will capital flight and excessive consumption, he said. "However, the ECB cannot just stop the continuing flow of cheap funds to Greece because it has to treat Greek banks and other banks equally," as governed by European Union rules.

Without access to regular channels of ECB lending because of a lack of quality collateral, Greek banks are now relying on euros printed by the Greek central bank which can obtain a license to do so as long as the Greek government signs a pledge to make up for any losses, he said.

"However, the ECB cannot tolerate this for too long," as it has already provided 120 billion euros to Greek banks, about 60 percent of its GDP, he added.

This put the ECB in a quandary -- either it leaves the tap on and allows the Greek central bank to continue supplying its banks with cheap credit, or it turns off the tap completely, which would entail the immediate collapse of the Greek banking system, Gros said.

A GREEK EXIT: LEGALLY IMPOSSIBLE BUT PRACTICALLY SPEAKING?

Massive increases in domestic interest rates might still be sufficient to induce savers to keep their deposits in Greece and refrain from excess consumption, Gros said. "Otherwise, Greece will have to leave the euro to make the adjustment happen, when the ECB doesn't provide more money."

Gros believes Greece should take necessary measures in the next monetary year to stop deposit flight and over-consumption.

"However, this is not certain. There is a 50 percent chance of a Greek exit from the single-currency area," he said.

Asked how Greece would be allowed to leave the euro area, Gros said while the prospect remains legally impossible it may become necessary.

"It's like if we have a door there which says no exit, if you are a low-abiding person, you don't exit. But if you have a fire behind you, you say I don't care and you open the door," Gros said.