If the financial turmoil in Europe sounds Greek to you it is because it is.
Markets are gripped by the saga of a Mediterranean economy ranked 32nd in size holding hostage the financial world. It is a measure of globalization –and its absurdity- that American consumers, European pensioners, Chinese workers and Filipino OFWs are all vested in the Greek outcome.
Greece is the case of the poor relative who could not afford to be at the party. The country is at the brink of financial default from its spree of overspending and over borrowing. This would be fine with the rest of us were it not a member of the eurozone. Its bankruptcy would trigger a run on the debts of Portugal, Italy, Ireland, and Spain -collectively with Greece appropriately known as the PIIGS- which are similarly if not equally overleveraged: and endanger banks holding this debt. Markets would tank worldwide potentially pushing economies already at the brink into recession.
(The crisis will impact the Philippines’ OFWs, weigh on exports, stocks and the peso, and raise our risk premium and foreign borrowing costs.)
To save the day, after extensive soul searching, the European Union came up with its version of shock-and-awe, a 240 billion euro lifeboat in exchange for serious austerity measures. The dynamic duo of Germany’s Merkel and France’s Sarkozy (otherwise known as Merkozy) told Greek PM Papandreou in no uncertain terms to either put up or be put out in the streets.
Specifically the country would be thrown into default and kicked out of the euro forcing it to return to a devalued drachma. While a weaker currency would make its economy more competitive in the long run, the initial impact would be a run on its banks, a spike in inflation and a freeze on new credits. Businesses earning drachmas but repaying euro loans would be devastated.
Two thirds of Greeks want to stay in Euroland but 80% are against the medication needed to do so; which is hardly useful. Markets want closure. As of press time the Government was trying to form a coalition to accept the EU package.
The closest parallel to Greece would be Argentina which in 2002 unpegged its peso against the dollar and defaulted on its debt. After substantial pain, the country was able to work its way out helped by a run-up in prices of commodities which it had plenty of and which, unfortunately, Greece has little of.
The irony is Greece is a 99 lb. gorilla. It accounts for only 2.5% of Euroland GDP. It is roughly a 250 billion dollar problem which is the extent of its overborrowing on its 500 billion debt. While large, this is a fraction of the several trillion losses it has caused in market declines globally.
This is a case of the tail wagging the dog: Investors could actually pass the hat to raise this money and still be ahead of the losses Greece has inflicted their portfolios.
The most logical candidates for a rescue (other than the EU governments) are the Asian and Middle East sovereign wealth funds which have suffered in the market turmoil and whose export-driven economies would most benefit from a return to growth. China alone has over $3 trillion in reserves.
True to form, China is asking for concessions in return principally for freer access to European markets and arms sales. It does not want to be loved just for its money.
Will the resolution of Greece end the financial turmoil? Not permanently. The markets are already targeting the next weakest link perceived to be Italy. While its financial ratios are stronger than Greece’s, Italy still needs to be treated. Unfortunately, Italian PM Berlusconi has been weakened by allegations of corruption and womanizing so he is unwilling or unable to implement unpopular economic reforms. He is now also asking for concessions similar to the 50% discount that Greece was granted by its creditors. The problem: Italy’s debt is over 5 times larger. It is a 600 lb. gorilla.
There is also concern the economic chemotherapy will kill rather than cure the embattled countries.
There is a solution to the current economic crisis. The money is there if in the wrong pockets. The problem is the failure of politicians, the public and sovereign funds to go beyond their narrow perspectives. Without a collective will everybody loses.
Perhaps this is the universe’s message: Be it global warming, war, famine, pestilence or inequality, unless humans come together as a species we will fail as a planet.
Let’s think about that.