Will Greece lead the world into a double dip recession?

The financial and political challenges in Europe just keep getting bigger as far as the financial markets are concerned. Greece has finally had a financing deal put to it which amounts to €130 Billion Euro, with most of that coming from Germany and France. I wrote in an article last week “Is this the beginning of the End for the Euro?” ( http://wp.me/pS6DN-1j), that this financial crisis and possible default by Greece could lead ultimately to a breakdown of the Eurozone. On the evidence from the streets in Europe and the financial markets around the world, this concern still exists. Last week Portugal and then Spain had their credit ratings lowered, and this means that the cost of borrowings required by these countries to service public debt increases. The European Central bank has also had to change a ruling allowing it to accept Greek Bonds that were rated as Junk status, which means it was likely a return of only 50% was possible on these loans/bonds. The ECB had to do this as Greek bonds were held by many of the largest banks in Europe, and not to accept them could have caused more bank collapses. Of course now it means the ECB holds Greek bonds that are nearly worthless. But what effect could this all have on the world economy?

In 2008 when Lehmann Brothers Investment bank collapsed, it led to a loss in confidence in the financial markets, and many banks around the world but particularly in North America and Europe, either collapsed or required large bailouts from governments. Most economies with a few exceptions such as Australia went into recession, and all economies required government supported economic stimulation packages to prevent a global depression. Banks stopped lending to each other, and the cost of finance increased, which placed greater stress on financial markets, and lead to measures such as governments guaranteeing bank deposits, and interest rates slashed by central banks in order to stimulate spending.

All of this has led to governments around the world racking up public debt, and this is where we are at now. Greece has a debt to GDP ratio of over 13%, most other economies in Europe have similar or higher debt ratios. The Greek economic bailout of €130 billion, will only account for about a third of the total Greek debt, and will require cutting of Greek expenditure to a point where in 2014 the debt to GDP ratio needs to be lower than 3%. This means public spending is slashed, no more stimulus, wage freezes or cuts in the public sector, and pensions will most likely be reduced. In Greece people have taken to the streets and are protesting and rioting…they are not happy. In Germany, public opinion is very much against the German people funding this bailout package for Greece, the results of regional elections in the coming week will determine whether it will have a real political impact in Germany. The reactions so far amongst the citizenry in Germany will probably ensure the political reality is that any future financial bailout will be small or nonexistent for other economies on the brink of collapse in the Eurozone. Portugal and Spain in particular must be concerned….

The experience with Lehmann Brothers in 2008 was that as soon as one organisation collapsed the market looked for the next target and on and on, hopefully the financial markets will not see Greece as the first in a series of economies to collapse and start chasing down Portugal, Spain and Italy. If they do, then there is unlikely to be a safety net ready to bail them out. Confidence in Europe is very low, with the Euro losing value against most other currencies, and there have also been reports that banks in Europe have stopped or slowed lending to each other again. Hopefully this is not a situation of history repeating itself, if so; we may be heading for another global recession…or a double dip recession. The question is, will governments have enough cash to stimulate their economies a second time in 24 months?

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About Nathan H. Gray
Nathan H. Gray is Managing Partner of AsiaAustralis. AsiaAustralis is a stategic consulting service partnership established by experienced international management consultants to assist private and public organisations achieve their strategic objectives in trade, investment and government relations throughout the Australasian region with a particular focus on SE Asia. Based in Adelaide, South Australia, AsiaAustralis has a network of associates throughout Australia and Asia that can be called upon to assist and facilitate major projects, business opportunities and government to government trade and investment facilitation. To Contact AsiaAustralis check out the website: www.asiaaustralis.com or send Nathan an email: nathan@asiaaustralis.com

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