How Ireland Will Destroy the Euro

Ireland's decision to guarantee all bank deposits will contribute to the demise of the single European currency, because it will erode the euro's credibility if it's allowed to go ahead, Hugh Hendry, chief investment officer and Partner at Eclectica Fund, told CNBC on Thursday.

The plan pledges to guarantee the liabilities of six Irish-owned banks totaling some 400 billion euros ($565 billion), more than twice the country's annual gross domestic product.

"The decision, if left to stand … my prophecy is it will bring down the currency. The euro is not a tenable currency if you have politicians making such decisions. The reality is there is no such thing as a free lunch," Hendry told "Squawk Box Europe."

"If I was German, I would say give me back my Deutschmarks," he added.

(Watch Hugh Hendry and Charles McKinnon, CIO of Thurleigh Investment Management, on CNBC above).

On Thursday, Irish lawmakers backed the plan and the government said it may be extended to foreign banks with retail units in Ireland, but it has raised questions in Brussels and London about competition and state-aid rules.

Promises of lavish spending such as this and others being discussed in Europe will erode investors' confidence, Hendry warned.

"McDonalds has got less chance of going bust than the British government," he said. "When our government comes to issue this sea of money they're going to pay through the nose … if we can't constrain that behavior, we're going to pay for it."

"We're on the verge of a sovereign debt default in Europe."

The current crisis stems from central banks easing monetary policy and flooding markets with liquidity to kick-start the economy after the dot-com bust in 2000, Hendry said.

"The reality is we should have had a stinking recession at the turn of the century. We burnt and destroyed lots of capital, we should have suffered from it," he said, adding that former Federal Reserve chairman Alan Greenspan thought he could "abolish the economic cycle" by inflating house prices.

Currently, Hendry owns "bonds, government bonds," and he might be "contemplating selling my gold equity shares," he said.

• Click Here for a Special Report on Europe's Banking Crisis
• Gov't Should Buy Banks to Avert Depression: Hendry

© 2008 CNBC.com