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European Default Has to Happen: Mark Mobius

As fears grow that the Cyprus crisis could spread to other parts of the euro zone, renowned investor Mark Mobius says that a default is the only way to solve the single-currency bloc's problems.

"It [bailout] never solves the problem because at the end of the day, you have to have a default. There is just no way," Mobius, executive chairman at Templeton Emerging Markets Group, told CNBC's Cash Flow on Thursday.

"The default will take place with a longer time period, in other words, they will stretch out payments so that at the end of the day, as the economies recover, they are gradually able to pay off these debts," he added.

The emerging market guru's comments come as troubled Cypriot banks are set to re-open on Thursday after being closed for nearly two weeks as a debt bailout deal, which includes taxing large savers, was worked out with the euro zone.

(Read more: G4S Readies Guards as Cypriot Banks Prepare to Open )

In a sign that worries about the fallout from Cyprus are growing, other debt ridden nations like Italy struggled to sell 6.9 billion euros ($8.8 billion) of five-year bonds at an auction on Wednesday, while yields on Spanish debt crept above 5 percent, a worrying sign for analysts.

Mobius said it was the "crazy" decision to tax Cypriot depositors that has turned a "small Cyprus issue" into a major euro zone problem.

"What happens is that savers in Spain, Italy, Portugal, and these other southern European countries begin to say hey 'my savings are not going to be safe,' and the savers are the people keeping these banks alive, they've got to keep those savers in the banks," Mobius said.

Euro Has to Devalue

Mobius added that the "strong" euro has to weaken so that the euro zone sovereigns can devalue their debts.

"That I think will eventually happen. You will see a deterioration of the euro against other currencies, particularly against emerging market currencies," Mobius said. "When that happens then you are able to pay off all these debts."

(Read more: Euro Zone Overrates Ability to Curb Contagion: Moody's )

The euro hovered near four-month lows of 1.278 against the U.S. dollar on Thursday, coming under renewed pressure. But Mobius said the single currency needs to fall further.

"The euro should be weaker, but it hasn't weakened," Mobius said. "That's the amazing thing, means there are people out there holding euro and even buying euro, it's a very strange phenomenon."

-By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu

Contact Europe: Economy

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