20 May 2010

Greek tragedy averted – or not?

Is the world heading for another wave of the Global Finance Crisis?

The question is being sparked by Greece’s basket-case economic situation and continues to be asked despite the fact that Eurozone nations have just given the green light to a historic $US147 billion bailout to rescue Greece from bankruptcy.

While immediate fears have been allayed there are mixed opinions about whether the massive aid package will prevent the country defaulting and avert a dreaded contagion effect from Greece’s critical debt fallout.

The Greek debt crisis has been on the boil for months.

But when credit ratings agency Standard & Poor’s downgraded the country’s debt to “junk” status and subsequently lowered the credit rating of Spain and Portugal, financial markets went into a spin.

Surprisingly the Greek bailout failed to instill investor confidence, as the declining euro and falling European stocks clearly demonstrated.

Greek Prime Minister George Papandreou may be talking the right talk regarding “savage” budget cuts in return for $US147 billion dollars worth of financial support, but will Greek citizens abide by the austerity measures that are about to be implemented?

There are major concerns that hefty interest payments and popular unrest could still result in the country defaulting.

“And if they’re using those cards to pay their utility bills – stop it.

As Greece, whose 240 billion euro economy plunged into recession last year, unveils dramatic austerity cuts to comply with the strict requirements of the bailout, it is also becoming clear that while some characteristics of the Greek fiscal meltdown are unique to Greece many aspects of the crisis are common to other countries within the European bloc.

Many see the Greek financial implosion as symptomatic of other European economies as fears heighten about the growing fiscal disaster in other European nations, notably Portugal and Spain.

Certainly the financial future of all three countries is looking bleak.

A renewed sense of panic about another potential wave of the financial crisis is starting to be felt as the Greek implosion is equated to the Lehman Brothers collapse, with global financial consequences potentially equally disastrous.

Then there are those who maintain that the Greek bailout is just a band-aid solution. The alternative, allowing Greece to default, is seen by some economists and finance gurus as a more sustainable resolution.

Charles Ortel, Managing Director of California-based research firm Newport Value Partners, suggests it would be cheaper for France and Germany to shore up their banks and simply face a Greek default as opposed to depositing billions of dollars into Athenian coffers.

Yahoo Finance quotes Ortel saying: “Unless Greece is able to make the ‘tough choices’ and dramatically cut spending – and its citizens are already protesting against the proposal  – an aid package will prove to be a temporary band-aid solution.

“I’m afraid default may make a lot more sense because it will allow the liabilities to be dealt with internally.”

Sydney economist Oliver Hartwich also supports the notion of default versus bailout.

His suggestion, made on ABC TV, is for Greece to reintroduce the drachma (the currency used in Greece prior to conversion to the euro in 2002) and regain its competitiveness despite the risk to European banks.

Hartwich was quoted in The Australian saying that it would be cheaper for Greece to default on the E300 billion ($430bn) it owed – even if it forced a second round of government bailouts for French, Italian and German banks.

Whatever you do, don’t put those pressies on the card, Ms Southon said.

“If we are pumping in E45bn this year, more next year and so on, then that money is lost,” he said.

“We are throwing good money after bad and it’s probably better to have a clean cut now. Let Greece go under, let’s bail out our banks, let the Greeks reintroduce their old currency and then devalue. That’s the best chance for Greece to actually regain its competitiveness.”

Hartwich asserts that the risk of contagion to other countries outside the euro zone is real.

If things do go pear-shaped what is the likely impact on Australia?

The Reserve Bank of Australia (RBA) assistant governor Guy Debelle recently told a breakfast gathering at the Mortgage and Finance association of Australia that Australia has so far been shielded from the Greek financial crisis.

However he issued a warning that although the crisis has to date been confined to nations within the Eurozone this could change.

Australian banks have so far not been affected by the crisis,” Debelle said.

“We’ve seen re-borrowing costs and borrowing costs in some countries in Europe go up quite a lot, but we haven’t seen any effect on Australian banks’ funding costs or on mortgage-backed securities.

“It hasn’t affected countries outside of Europe but, obviously, if financial markets deteriorate, some of these things are going to go back.”

ANZ chief executive Mike Smith has been quoted in Business Spectator saying that sovereign debt problems in Europe could affect Australian markets, specifically in terms of its dependence on access to the international credit market.

He said that the concern is very relevant to businesses across the country.

“I think it will probably have an effect on equity and credit markets, but credit markets I think is more relevant to the Australian situation,” he said.

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