FinancialMirror.com
December 12 - 18, 2012
20 | WORLD MARKETS
Lessons to learn from Greece “The one thing I know is that I know nothing.” Socrates could have been anticipating the response of Greek and European leaders to the modern day debt crisis. What went so catastrophically wrong in Greece? As the country undergoes a major debt reconstruction, impacting on the wider Eurozone economy, let’s figure out what lessons the continent can learn for the future. First, step back and consider the root of the problem. Like any person or country in debt, Greece is guilty of spending more than it could afford. After joining the single euro currency, the traditionally strong public sector saw wages rise to unsustainable lev-
By Oren Laurent President, Banc De Binary
els. They increased by 50% between 1999 and 2007, a problem which was compounded by the low retirement age and high benefits. The cost of the 2004 Olympic Games in Athens certainly did the country no favors. Combine as well a huge level of tax evasion by citizens and businesses, and it is hardly surprising that the economy struggled. When its money ran out, the government turned to European banks for loans and was soon borrowing billions. Greece’s budget deficit was out of control. Successive governments concealed the extent of its borrowing as they sought to meet the 3% GDP cap required by euro member states. The country disguised its debts as commodities, sold them off around the continent, and became indebted to banks in France and Germany in particular. When debt levels reached the point that Greece could not repay its loans, it could no longer hide.
Cut to the present. The country’s economy and social infrastructures are in ruins. In late November, a plan was agreed by the key creditors to cut Greek debt to 124% of the national output by 2020. On Saturday, Greece’s debt-management agency, charged with conducting a deal to buy back debt, revealed that the total bid from both domestic and foreign holders of Greek bonds was close to the targeted €30 bln. The weekend’s news is as promising as it gets for now, yet the overall situation is far from hopeful. Why should the world care? Can we not simply let Greece sink under its own weight? In sharing a currency, Eurozone countries committed themselves to the long haul, for better or for worse. The idea was that a strong Europe could support a suffering state in its time of need. In reality, following the global financial meltdown, Europe is too weak to do this. Yet the economies remain intertwined. A default would shatter otherwise monetarily strong countries like Germany. Crucially, if Greece fails to repay its creditors, a dangerous precedent will have been set. Investors would become wary of other highly-indebted nations, such as Italy, or those with weak economies, such as Spain. Should investors stop buying bonds issued by governments, they would not be able to repay their creditors, creating a lethal vicious cycle. If banks in the weaker Eurozone countries are forced to write off even more loans, they will become weaker and unable to borrow and lend, risking a second credit crunch. The situation would be immeasurably worse if Greece were to leave the euro and reintroduce the drachma, which would devalue dramatically, making it even harder for the country to repay its debts. Europe cannot afford to let Greece off the hook, although the cost of supporting it is huge. So what can we conclude from all this to prevent other countries following suit? Firstly, Eurozone countries need to impose stricter limits on themselves. It is not enough to recommend manageable levels of debt and borrowing without actively monitoring and enforcing them. We can certainly expect the introduction of more policies to this effect, but the true test will be whether
countries follow words with actions. Secondly, Greece probably would not have fallen so badly if it had been transparent from the beginning. Ever lied about your income to impress someone or brought one too many pairs of shoes for your budget? As we’ve discussed, Greece did both on a much bigger and more detrimental scale. Sharing a currency, much like sharing a bank account, requires honesty and communication. Countries must realize that they cannot lie to themselves, much less to others, about their fiscal affairs. Thirdly, the Greek crisis is a reflection on the poor leadership in the Eurozone and the failure of stronger countries to recognize both the severity of the problem and the extent of its repercussions. If the Eurozone model is to have any chance of working in the future, political and economic leaders need to recognize that the success or failures of one member is the success or failure of the whole. That is not to say that countries cannot have their own strengths, economies and policies, but simply that it is in the interests of all member states to help a friend out. For the sake of European and global economies, let’s hope that this crisis is resolved before other countries fail and reach the point of no return. Until then, keep your eyes on the Euro. www.bbinary.com
Euro hovers above 2-week low The euro hovered above two-week lows on Tuesday as nerves calmed over Italy’s latest political turmoil for now and as prospects of more stimulus from the Federal Reserve pinned down the dollar. Expectations that the Fed will announce fresh easing steps on Wednesday also lifted high-yielding currencies against the dollar, boosting the Canadian dollar to a two-month high and the New Zealand dollar to a ninemonth high. The common currency stood at $1.2957, up 0.15% from late U.S. levels and above a low of around $1.2880 plumbed on Monday. Immediate resistance is seen at $1.2973, a level representing the 38.2% retracement of its December 5-7 fall. The euro found some support after Italian Prime Minister Mario Monti played down
market fears over his decision to resign, saying there was no danger of a vacuum ahead of an election in the spring. Monti’s move came after former prime minister Silvio Berlusconi abruptly withdrew support for Monti’s technocrat government, accusing Monti’s reform and austerity steps of dragging Italy “to
Another factor keeping the euro off its lows was a reluctance by investors to aggressively buy the dollar, given expectations the Fed will replace its expiring ‘Operation Twist’ programme with another Treasury bondbuying plan at its two-day policy meeting starting later in the day.
FOREX COMMENTARY & TECHNICAL ANALYSIS the brink of a precipice.” Although Italian bond and shares were hit by the news, that did not lead to rise-averse sentiment in broader financial markets, partly on the view that debt buying programme by the ECB could curb selling in Italian debt, should their yields keep rising.
Many economists believe the U.S. central bank will announce monthly bond purchases of $45 bln, although some think it could surprise with a bigger amount to press borrowing costs lower. Such an outcome could see the greenback come under further pressure. The dollar was buying 82.37 yen, still not far
from an eight-month peak of 82.84 set last month, though the currency pair has been stuck in a narrow trading band for the past couple of weeks after a sharp gain in midNovember. The yen has been under pressure from expectations that opposition leader Shinzo Abe, a front-runner to become prime minister after an election on Sunday, will push the central bank to take more aggressive easing steps. The Canadian dollar edged up slightly to a two-month high of C$0.9862 to the U.S. dollar while the New Zealand dollar rose to a nine-month high of $0.8358. The Aussie briefly dipped following a surprise plunge in Australia’s business confidence but pared most losses to stand at $1.0482, not far from an 11-week high of $1.0515 set last week.
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