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Debt Reduction Alone Will Not Help Greece: Dallara

A cloud of uncertainty has been lifted as Greece's lenders agree on new debt targets, paving the way for the country to receive another tranche of aid, but according to one expert, what Greece needs is not debt reduction but growth to get out of the doldrums.

Bloomberg via Getty Images

Charles Dallara, managing director of the Institute of International Finance (IIF) told CNBC Asia's "Squawk Box" on Tuesday that the beleaguered European nation needs to restart its engines of growth to revive its economy.

"I was just in Greece and the economy is exceptionally weak. There is simply no way in my 35 years of experience of dealing with sovereign debt to improve and genuinely stabilize the economic and debt sustainability outlook for a country unless you can stabilize and turn around the underlying economy," said Dallara.

Dallara led negotiations with Greece earlier this year to restructure the country's debt held by the private sector, wiping some 100 billion euros ($130 billion) off its national debt. The IIF represents about 450 of the world's largest financial institutions including banks and insurance companies.

Late on Monday night, Greece's international lenders agreed, after nearly 10 hours of talks, to reduce Greek debt by 40 billion euros ($51.9 billion), cutting it to 124 percent of gross domestic product (GDP) by 2020 via a package of steps.

Greece's sovereign debt currently stands at 170 percent of GDP, making it euro zone's most heavily indebted country. Its economy in the meantime has shrunk by more than a quarter in the past five years and unemployment has risen to a record 25 percent.

Over 70 percent of Greece's debts are now owed to official lenders such as the European Central Bank and International Monetary Fund. Private-sector bondholders, represented by the IIF, agreed to write off some of Greece's debt earlier in the year, but Germany is so far resisting calls for further debt relief for Greece.

Greece is expected to enter a sixth year of recession in 2013 as the government keeps cutting spending and raising taxes to comply with the demands of its international bailout.

(Read more: Greece's 'Monster' Debt Problem Haunts Europe)

But Dallara said the focus on debt reduction may not be the correct approach.

"We keep coming back to these (debt) numbers which, in my view, have become a somewhat artificial distraction here," he said," Because no matter what numbers we may put on the debt-to-GDP target today, all of it depends not on how to slice and dice that debt, but on renewing growth in the Greek economy. That's where the focus should be, in my view."

If the engines of growth are not restarted in what he calls the "southern periphery nations" of Greece, Italy and Spain, the stronger nations such as Germany and France may be weighed down, he warned.

"It's time for Germany and France, particularly German authorities, to wake up to the real risk that the malaise that surrounds the European economy will continue for some time without a breakthrough in the southern periphery," he said. "That's why it is so important to restart the engines of growth in Spain, in Italy, and in Greece, which will give a lift to all of the euro zone."

The contagion appears to be spreading to the stronger euro zone nations. France, the bloc's second-largest economy, had its triple-A credit rating stripped last week by Moody's Investors Service, which cited the country's "deteriorating" economic prospects and the consequent risk to government finances.

(Read more: France's Finance Minister Says Fundamentals Solid After Downgrade)

"I am not that concerned about the French or German outlook in the near-term. But I do think that without breaking the deadlock that has a grip on the southern economies of Europe, that the weight of this will become increasingly an albatross on the back of the stronger economies of Europe, including Germany," Dallara said.

—By CNBC's Jean Chua.

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