So, is Greece, Spain, or Italy either one going to be the next Lehman Borthers ? Maybe they are not huge enough to cause global financial markets to freeze up the way US and Asian crisis did in 2008. Is it seriously that we're seeing the start of a run on all European government debt. United States borrowing costs actually plunged on Thursday to their lowest level in months. And while worriers warned that Britain could be the next Greece, British rates also fell slightly. Greece's problems are deeper than European leaders are willing to acknowledge, even now - and they're shared, to a lesser degree, by other European countries.
Many observers now expect the Greek tragedy to end in default; probably they're too optimistic, that default will be accompanied or followed by departure from the euro. The problem, as obvious in prospect as it is now, is that Europe lacks some of the key attributes of a successful currency area. Above all, it lacks a central government.Consider the often-made comparison between Greece and the state of California. Both are in deep fiscal trouble, both have a history of fiscal irresponsibility. And the political deadlock in California is, if anything, worse - after all, despite the demonstrations, Greece's Parliament has, in fact, approved harsh austerity measures.
So is a debt restructuring - a polite term for partial default - the answer? It wouldn't help nearly as much as many people imagine, because interest payments account for only part of Greece's budget deficit. Even if it completely stopped servicing its debt, the Greek government wouldn't free up enough money to avoid savage budget cuts.
The only thing that could seriously reduce Greek pain would be an economic recovery, which would both generate higher revenues, reducing the need for spending cuts, and create jobs. If Greece had its own currency, it could try to engineer such a recovery by devaluing that currency, increasing its export competitiveness.
What if bank runs happened, and just like the Argentine government imposed emergency restrictions on withdrawals. This left the door open for devaluation, and Argentina eventually walked through that door. If something like that happens in Greece, it will send shock waves through Europe, possibly triggering crises in other countries. But unless European leaders are able and willing to act far more boldly than anything we've seen so far, that's where this is heading.
EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn't apply to any other eurozone nation, such as troubled Spain or Portugal. They said the bailout should contain the problem by giving Greece three years of support and preventing a default when it has to pay 8.5 billion euros in bonds coming due on May 19.
Again yesterday, European leaders were almost desperately trying to talk away the problems. Agreement on rescue for Greece will be a demonstration of Europe's force, of solidarity. The markets have taken little heed. Stocks, Greek bonds and the euro plunged even yesterday. Along with the eurozone meeting, the G-7 finance ministers will hold a teleconference yesterday on the crisis, according to Japan's finance minister.
And on top of the eurozone summit, key leaders like France's Nicolas Sarkozy, German Chancellor Angela Merkel and ECB president Jean-Claude Trichet will huddle ahead of time seeking a common strategy to soothe the markets. Well these new leaders have to work harder before they can enjoy their lead in either running the government office or at home relaxing with their spouse and children....
16 May 2010 Sunday report on paper,
Yet financial experts say the Greek crisis is unlikely to spark another global meltdown.
The European Union (EU) rescue package (worth $1.4 trillion) is sufficiently large and wide-ranging as to put an end to concerns over a liquidity crisis that could have threatened contagion in global markets but many EU countries will likely see very slow growth for a number of years because the package requires nations with unsustainably large budget deficits to implement strict spending cuts and tax rises.
Greek crisis
Greece is at the centre of the storm. Credit agencies like Moody's questioned the state's ability to meet its debt obligations and downgraded its credit rating with an accompanying negative outlook.
There were already concerns over the high level of deficit-to-gross domestic product (GDP) ratio for Portugal, Ireland, Italy, Greece and Spain - known collectively by the acronym Piigs, noted First State Investments. The European Commission set a rule that this ratio should be kept at 3 per cent or lower but it turned out that the ratio for the Piigs exceeded a great deal. For instance, Greece, Portugal and Spain have a deficit-to-GDP ratio of 13.6 per cent, 9.4 per cent and 11.2 per cent respectively.
Contagion effect
Contagion risk is the fear that financial problems in one nation will spread to others which are linked to one another in some way. This happened during the Asian financial crisis when the currency turmoil in Thailand brought volatility in Indonesia and other neighbouring nations.
The contagion effect from the debt issues in Greece has hit other European countries, including the other Piigs. The potential contagion effect of any of these countries defaulting on their debts becomes clearer when we take a look at their loans to one another.
For example, Greece and Spain borrowed externally from many other European countries, in particular France and Germany. Germany and France are Spain's largest creditors with more than US$500 billion (S$694 billion) of exposure between them.
So the contagion risk is very real given that if any of the Piigs were to default, it would adversely impact the balance sheets of other EU countries.
Impact on stock markets
Stock markets have headed south in recent weeks and are experiencing significant volatility.
But experts are confident that this is a short-term reaction. 'Our 12-month fair value for the STI is 3,200. In the short term, we think the market will be range bound from 2,750 to 2,930,' she said. 'We will be buyers if the index falls back to 2,750 as further downside risk from there should be limited.'
While the weakened euro and current economic conditions in Europe may spell weaker demand for Asian exports, exports could still be supported by US demand and intra-regional trade. 'We do not believe that recent sell-off is a renewed bear market.'
While the short- to medium-term outlook is expected to remain cautious, the selldown has brought valuations to more attractive levels. Calling the selling a 'knee-jerk' reaction, smart money to gradually return to the market once the initial selling is over, as liquidity in the market remains strong.
In addition, equities continue to be good, long-term investments especially since current corporate results have generally been in line with or above expectations.
Impact on Asia
Though Asian investors may not be directly affected by the crisis, there are several indirect implications, such as declining demand for Asian exports.
The weakening of the euro means that European consumers have lower purchasing power, and with the EU being a key export market for Asian (economies) like China, Hong Kong, South Korea, Singapore and Malaysia, exports for these Asian economies could see a negative impact.
Financial experts pointed out that as an export market, Europe is as important as the US is, to Asia.
Asia's export exposure to Europe constitutes about 12 per cent of its total exports on average, with India and China having the largest export exposure of close to 20 per cent. Singapore has a 9.4 per cent export exposure to Europe.
The implementation of austerity measures in Greece is likely to be followed in weaker European economies like Portugal while larger economies like Britain are looking to rein in spending to avoid similar debt problems. This could signal a longer-term shift to weaker consumer consumption, and that is a negative for export-oriented Asian economies.
Other factors
Besides the Greek debt crisis, other possible headwinds for investors include the ongoing Goldman Sachs case where the US investment bank is facing a number of related lawsuits and investigations over the sale of mortgage-related investments. Another concern is the move by the Chinese government to curb rising property prices through tightening credit.
Well, what do we do with our cash, not worth to deposit in the bank and we need to make it growth with annual rate of few percentage point in order to benefit on it's cash value? Think twice to buy stocks at this moment, I suppose.
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EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn't apply to any other eurozone nation, such as troubled Spain or Portugal. They said the bailout should contain the problem by giving Greece three years of support and preventing a default when it has to pay 8.5 billion euros in bonds coming due on May 19.
Again yesterday, European leaders were almost desperately trying to talk away the problems. Agreement on rescue for Greece will be a demonstration of Europe's force, of solidarity. The markets have taken little heed. Stocks, Greek bonds and the euro plunged even yesterday. Along with the eurozone meeting, the G-7 finance ministers will hold a teleconference yesterday on the crisis, according to Japan's finance minister.
And on top of the eurozone summit, key leaders like France's Nicolas Sarkozy, German Chancellor Angela Merkel and ECB president Jean-Claude Trichet will huddle ahead of time seeking a common strategy to soothe the markets. Well these new leaders have to work harder before they can enjoy their lead in either running the government office or at home relaxing with their spouse and children....
16 May 2010 Sunday report on paper,
Yet financial experts say the Greek crisis is unlikely to spark another global meltdown.
The European Union (EU) rescue package (worth $1.4 trillion) is sufficiently large and wide-ranging as to put an end to concerns over a liquidity crisis that could have threatened contagion in global markets but many EU countries will likely see very slow growth for a number of years because the package requires nations with unsustainably large budget deficits to implement strict spending cuts and tax rises.
Greek crisis
Greece is at the centre of the storm. Credit agencies like Moody's questioned the state's ability to meet its debt obligations and downgraded its credit rating with an accompanying negative outlook.
There were already concerns over the high level of deficit-to-gross domestic product (GDP) ratio for Portugal, Ireland, Italy, Greece and Spain - known collectively by the acronym Piigs, noted First State Investments. The European Commission set a rule that this ratio should be kept at 3 per cent or lower but it turned out that the ratio for the Piigs exceeded a great deal. For instance, Greece, Portugal and Spain have a deficit-to-GDP ratio of 13.6 per cent, 9.4 per cent and 11.2 per cent respectively.
Contagion effect
Contagion risk is the fear that financial problems in one nation will spread to others which are linked to one another in some way. This happened during the Asian financial crisis when the currency turmoil in Thailand brought volatility in Indonesia and other neighbouring nations.
The contagion effect from the debt issues in Greece has hit other European countries, including the other Piigs. The potential contagion effect of any of these countries defaulting on their debts becomes clearer when we take a look at their loans to one another.
For example, Greece and Spain borrowed externally from many other European countries, in particular France and Germany. Germany and France are Spain's largest creditors with more than US$500 billion (S$694 billion) of exposure between them.
So the contagion risk is very real given that if any of the Piigs were to default, it would adversely impact the balance sheets of other EU countries.
Impact on stock markets
Stock markets have headed south in recent weeks and are experiencing significant volatility.
But experts are confident that this is a short-term reaction. 'Our 12-month fair value for the STI is 3,200. In the short term, we think the market will be range bound from 2,750 to 2,930,' she said. 'We will be buyers if the index falls back to 2,750 as further downside risk from there should be limited.'
While the weakened euro and current economic conditions in Europe may spell weaker demand for Asian exports, exports could still be supported by US demand and intra-regional trade. 'We do not believe that recent sell-off is a renewed bear market.'
While the short- to medium-term outlook is expected to remain cautious, the selldown has brought valuations to more attractive levels. Calling the selling a 'knee-jerk' reaction, smart money to gradually return to the market once the initial selling is over, as liquidity in the market remains strong.
In addition, equities continue to be good, long-term investments especially since current corporate results have generally been in line with or above expectations.
Impact on Asia
Though Asian investors may not be directly affected by the crisis, there are several indirect implications, such as declining demand for Asian exports.
The weakening of the euro means that European consumers have lower purchasing power, and with the EU being a key export market for Asian (economies) like China, Hong Kong, South Korea, Singapore and Malaysia, exports for these Asian economies could see a negative impact.
Financial experts pointed out that as an export market, Europe is as important as the US is, to Asia.
Asia's export exposure to Europe constitutes about 12 per cent of its total exports on average, with India and China having the largest export exposure of close to 20 per cent. Singapore has a 9.4 per cent export exposure to Europe.
The implementation of austerity measures in Greece is likely to be followed in weaker European economies like Portugal while larger economies like Britain are looking to rein in spending to avoid similar debt problems. This could signal a longer-term shift to weaker consumer consumption, and that is a negative for export-oriented Asian economies.
Other factors
Besides the Greek debt crisis, other possible headwinds for investors include the ongoing Goldman Sachs case where the US investment bank is facing a number of related lawsuits and investigations over the sale of mortgage-related investments. Another concern is the move by the Chinese government to curb rising property prices through tightening credit.
Well, what do we do with our cash, not worth to deposit in the bank and we need to make it growth with annual rate of few percentage point in order to benefit on it's cash value? Think twice to buy stocks at this moment, I suppose.
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Perhaps just as relevant has been the inability of various government-led support measures to have an impact - from the US$1 trillion safety net announced by euro zone finance ministers a fortnight ago to German bans on naked short-selling.
Will Euro survive ?
The euro, the common currency of 16 European Union nations, is undergoing its severest test since its inception in 1999. Now at a four-year low against the dollar, the euro's credibility has been hammered by the slow and confused European response to the debt crisis in Greece, which has now spread to Spain and Portugal.
European stock markets have retreated and a massive US$1 trillion rescue programme announced on May 9 has thus far failed to calm investors nerves. Suddenly people are asking what was unthinkable - will the euro survive, might the currency union fall apart? Since January, Europe has dawdled while Greece - one of the eurozone's weakest members - had to pay progressively higher interest rates on a debt that was growing faster than bond holders had been led to believe.
While Greece pleaded for help, Germany, the eurozone's biggest economy, resisted, saying the profligate Greeks had to clean up their own mess and cut government spending.
By April, Greece sought emergency help not only from its European Union partners but also from the International Monetary Fund. At the centre of the storm is 'Mr Euro', Jean-Claude Trichet, the astute 67-year-old Frenchman who has headed the ECB since 2003. By holding too long to the view that there was no possibility that Greece could default, Mr Trichet like others underestimated the magnitude of the Greek problem.
As the euro tumbled on exchange markets, government leaders finally realised that not just Greece but the entire euro currency project was at risk. At an emergency meeting in Brussels on May 7th eurozone leaders outlined the massive rescue package that emerged two days later from an 11-hour long meeting of finance ministers.
President Obama is not a passive bystander to the euro crisis. Alarmed that a double-dip recession and credit squeeze in Europe would derail the US recovery, Mr Obama telephoned the French, German and Spanish leaders urging prompt, decisive action. Mr Trichet, sobered by the crisis, is calling for 'a quantum leap in the governance of the euro area', meaning enforceable rules to assure fiscal discipline.
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HOW times change. It was fashionable even as recently as January this year, to proclaim that the euro would emerge as the world's key reserve currency because the United States was weighted down by its huge trade and fiscal deficits.
It was held as an article of economic faith that saver nations will, at some point, become unwilling to subsidise the penchant of Americans to consume far more than they produce. A disastrous fall in the value of the US dollar would end the unique advantage the US has enjoyed in possessing the global reserve currency since World War II.
Many lent their names to this theory. Even the former Federal Reserve Board chairman, Alan Greenspan, had an inkling of the US dollar's doom. It is 'absolutely conceivable that the euro will replace the (US) dollar as the reserve currency, or will be traded as an equally important reserve currency', he told the weekly, Stern, in 2007.
For now at least, all these views seem misplaced. The euro is gasping for air. In a dramatic reversal, the euro has fallen nearly 22 per cent from its peak reached in July in 2008.
When it was launched in January 1999, the euro was placed at a slightly stronger level against the dollar. Then, it fell through parity and languished for three years. It went down as low as US$0.82 in October 2000, before soaring to a high of US$1.60 in July, 2008. This remarkable surge helped to spread the optimism about the euro's dominant future. Conspiracy theories began to take shape. Wasn't the euro a factor behind the invasion of Iraq?
As the US dollar began to crumble, talk was rife that Opec would finish the job, delivering a deadly blow to American prestige and economy.
There were reports of a secret understanding among the big oil producers to dump the US dollar.
Indeed, across the world, central banks stepped up their holdings of euros in their reserves. According to the International Monetary Fund, euro-denominated reserves with central banks, excluding China, rose to 672 billion at the end of last year, from 97 billion in the first quarter of 2002. While China intends keep to diversifying its holdings, Russia has trimmed its euro reserves and Iran is having a rethink of its reserves.
For years, the euro seemed to defy the question of how a common currency could run without a common government. Many economists indeed thought that, after the initial years, a recession would wreck eurozone cohesion.
The scenario put out was that when a recession affects weak areas of Europe, it would lead to a conflict of interest vis-a-vis countries committed to disciplined economic policy.
Weak economies with populist governments, wanting low interest rates, would be willing to put up with some inflation. But strong economies like Germany, serious about maintaining price stability at all costs, would not oblige. And Europe would struggle to handle 'the asymmetric shocks' that would follow. Language barriers and a general reluctance of European labour to move within the eurozone would further handicap the governments.
That script is now being played out. Germany's unilateral ban on naked short-selling - which was immediately opposed by France - has exposed a lack of cohesion in the EU nations. Worries are growing about the contagion spreading. The prospect of widespread government spending cuts is raising the spectre of social unrest and political turmoil in Europe. Analysts and chartists are predicting further falls in the value of the euro, which is trading at about US$1.23 now, or close to a four-year low.
So for now, and what for it is worth, the American dollar is back again as the top reserve currency and a safe haven.
However, while Europe is indeed in the midst of a major crisis, the economic shockwaves can travel beyond European shores. Moreover, the US has enormous budget deficits and debts as well. And many US companies have major exposures to the European continent - all of which makes the US economy also vulnerable.
