Tag: Greece

  A strategist at the Deutsche Bank had something interesting to say last week regarding the economic crisis in southern Europe.

 “The problems currently faced by peripheral Europe could be a dress rehearsal for what the U.S. and U.K. may face further down the road,” Jim Reid, a strategist at Deutsche Bank in London, wrote in a research note today.

 It seems impossible that what is going on in Greece has anything to do with America. After all, Greece has defaulted on its debts so often over the last two centuries that you could almost set your watch to it. It was always contained in the past because Greece’s economy is so small, so why would this time be different this time?

 And yet, it isn’t contained this time. It is spreading and no one knows how far it might go.

  There is a concept in economics known as the “snow-ball effect” on debt. It involves the self-reinforcing effect of debt accumulation arising when the growth of the national economy is less than the interest paid on public debt.

  In math it looks like this:

 I’m not going to focus on the mathematics here when the way the financial markets are reacting to Greece is all you really need to know.

 Insurance costs against a Greek government default leapt to a record after leading debt analysts warned the country’s economy could face a ‘slow death’ because of its deteriorating finances.

 The concern is that Greece’s economy is fundamentally uncompetitive in the world market, that it must borrow just to maintain its basic needs, and that interest payments on the debt accumulation is now reaching levels that has forced Greece to drastic action. Raising taxes and cutting social services to pay the interest will smother the economy further, making more borrowing necessary.

  Events are rapidly coming to a head in Greece, and the consequences could ripple through all of Europe.

 Leading Greek economists and bankers yesterday warned George Papandreou, prime minister, that he had to announce bold initiatives to rescue the country’s collapsing bond market and avert the possibility of defaulting on a rising public debt.

…

 Yannis Stournaras, an Athens University economics professor and former chief adviser at the finance ministry, said: “Other countries in trouble have already taken measures. If we don’t quickly follow suit the adjustment will be imposed by markets and it will be violent.”

 How violent? Maybe not as violent as the protests in the streets of Athens. Already there are student, pensioner, and public worker protests and strikes. Remember that the current government is only two-months old, after the old government nearly collapsed under the pressure from street riots.

  This puts the current government in an extremely difficult situation. The public debt is set to rise next year to 124 per cent of GDP, with a fiscal deficit of over 12%. Meanwhile, the public pension fund is expected to go into the red as early as 2011. The fiscal squeeze requires draconian cuts, but the public workers of Greece are not a wealthy group. They will have no choice but to turn out into the streets en mass.

  Premier George Papandreou recognizes that.

 “Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state,” he said.