Will Greece set off 'global debt bomb'?
Threat of new crisis hits shaky world economies
http://www.thestar.com/news/article/761755--olive-will-greece-set-off-global-debt-bomb?bn=1
The inevitable "sovereign debt panic" finally struck last week, causing severe one-day drops in stock markets from New York to London to Toronto on Thursday.
Ostensibly, the epicentre of the crisis is Greece, in danger of defaulting on its debt payments to worldwide holders of its government bonds, or sovereign debt.
But the fear about state defaults quickly spread to Spain, Portugal and Ireland, fiscal train wrecks that together with Greece now go by the unfortunate acronym PIGS.
Even then, the scope of a potential second global financial crisis so soon after the credit crisis of 2008-09 goes far beyond the euro zone, the 16 nations sharing a common currency, the euro.
Last week's dramatics could have been far worse. And they may yet manifest themselves in an ugly fashion in weeks to come if the euro-zone countries don't rescue what Greek Prime Minister George Papandreou described last week as "the weakest link in the euro zone."
Greece accounts for just 3 per cent of the euro-zone economy. The crisis in the cradle of Western civilization serves merely as proxy for government over-indebtedness everywhere.
Only a few months ago, a Dubai on the edge of default had to be bailed out by oil-rich neighbour Abu Dhabi. A debt-strapped Argentina recently tried and failed to pay debts by raiding its central-bank treasury.
Greece's debt-to-GDP ratio is an eye-popping 95 per cent. But then, the U.S. isn't far behind at 84 per cent. (The Canadian ratio is estimated at 35.5 per cent in the current fiscal year.) Greece's deficit-to-GDP ratio is an alarming 13 per cent. But then, Britain isn't far behind at 12.6 per cent.
Just last month, California-based PIMCO, the world's biggest bond investor, warned that Britain's bonds ware "resting on a bed of nitroglycerine." And last week, Moody's, the U.S. bond-rating agency, warned the U.S. of a looming downgrade that would strip America of its coveted Triple-A bond rating, which would push up borrowing costs.
The world is awash in potentially unsustainable debt.
The U.S. looms largest. President Barack Obama just tabled a budget that projects a doubling in America's national debt, to $28 trillion (U.S.), by decade's end. That's twice the size of the U.S. economy.
Few nations emulated Canada's example of 11 consecutive budget surpluses heading into the Great Recession. And so the necessary stimulus spending to inject life into paralyzed economies worldwide has inflated already burdensome debt loads accumulated by less prudent jurisdictions than Canada, Australasia and a handful of others.
To cover their stimulus-related and other debt obligations, national governments are expected to borrow a staggering $4.5 trillion (U.S.) this year. That's almost triple the average for advanced economies over the previous five years.
Any hint that certain issuers of those government bonds and other borrowings are flirting with deadbeat status will jack up the interest rates bond-buyers will demand. That could easily lift the general level of interest rates worldwide. Which in turn would raise the cost of capital for businesses and individuals. And that would be a major impediment to economic recovery at a time when central banks are trying to keep their key lending rates at or near zero to encourage investment and job creation.
In order not to set off this "global debt bomb," as Forbes describes the plight on its latest cover, the EU and the better-off EU nations haven't much choice but to rescue Greece. Recalling how the failure of just one New York brokerage, in September 2008, turned a local banking problem into a full-blown global crisis, EU officials now regard Greece as "Europe's Lehman Brothers."
A coordinated EU bailout of Greece, spearheaded by Germany, would defend the value of the euro. It would bolster an EU whose reputation would otherwise suffer from having abandoned one of its members. And it could stave off a currency and debt crisis that would likely be a worldwide spectre.
Indeed, it's difficult to imagine any other scenario – repugnant though it is, especially to the fiscally austere Germans – than to "reward" a fellow EU member for its chronic incompetence in managing its national finances.
Ever since the Lehman collapse, Europeans have been a little smug about how an inadequately supervised Wall Street tipped Europe and most of the rest of the world into the worst economic slump since the Dirty Thirties.
Now the tables are turned. For a decade the EU gave Greece a pass on its consistent failure to come even close to meeting the EU's own benchmarks for budgetary prudence. If there is to be a second global economic crisis, its origins will be traced to European laxity, not asleep-at-the-switch U.S. financial regulators.
In Athens last week for a conference, Nobel laureate Joseph Stiglitz, a liberal economist, counselled against the austerity measures the Greek government has just imposed – including wage freezes, pension cutbacks and budget slashing across government departments. He cavilled against the "deficit fetish" for which the International Monetary Fund and the World Bank are notorious.
The compelling counter-argument is that global markets aren't as rational as Nobel laureates. They need assurance now that Greece will not become an insolvent Iceland. And that the EU will backstop Spain, Portugal, Ireland and any other EU member that has obligations outstanding to world banks, already undermined by losses on U.S. subprime, or junk, mortgages and other "toxic assets."
Even Stiglitz's fellow liberals on the Continent are insisting Greece "be helped with all the fiscal brutality" of which the EU is capable, as Germany's centre-left Suddeutsche Zeitung editorialized late last week. The EU "has taken the first step to putting the country under its control, and virtually deprive it of its sovereignty. This is the worst imaginable punishment for a nation."
And a necessary one, to preserve a still shaky world financial order.
Threat of new crisis hits shaky world economies
http://www.thestar.com/news/article/761755--olive-will-greece-set-off-global-debt-bomb?bn=1
The inevitable "sovereign debt panic" finally struck last week, causing severe one-day drops in stock markets from New York to London to Toronto on Thursday.
Ostensibly, the epicentre of the crisis is Greece, in danger of defaulting on its debt payments to worldwide holders of its government bonds, or sovereign debt.
But the fear about state defaults quickly spread to Spain, Portugal and Ireland, fiscal train wrecks that together with Greece now go by the unfortunate acronym PIGS.
Even then, the scope of a potential second global financial crisis so soon after the credit crisis of 2008-09 goes far beyond the euro zone, the 16 nations sharing a common currency, the euro.
Last week's dramatics could have been far worse. And they may yet manifest themselves in an ugly fashion in weeks to come if the euro-zone countries don't rescue what Greek Prime Minister George Papandreou described last week as "the weakest link in the euro zone."
Greece accounts for just 3 per cent of the euro-zone economy. The crisis in the cradle of Western civilization serves merely as proxy for government over-indebtedness everywhere.
Only a few months ago, a Dubai on the edge of default had to be bailed out by oil-rich neighbour Abu Dhabi. A debt-strapped Argentina recently tried and failed to pay debts by raiding its central-bank treasury.
Greece's debt-to-GDP ratio is an eye-popping 95 per cent. But then, the U.S. isn't far behind at 84 per cent. (The Canadian ratio is estimated at 35.5 per cent in the current fiscal year.) Greece's deficit-to-GDP ratio is an alarming 13 per cent. But then, Britain isn't far behind at 12.6 per cent.
Just last month, California-based PIMCO, the world's biggest bond investor, warned that Britain's bonds ware "resting on a bed of nitroglycerine." And last week, Moody's, the U.S. bond-rating agency, warned the U.S. of a looming downgrade that would strip America of its coveted Triple-A bond rating, which would push up borrowing costs.
The world is awash in potentially unsustainable debt.
The U.S. looms largest. President Barack Obama just tabled a budget that projects a doubling in America's national debt, to $28 trillion (U.S.), by decade's end. That's twice the size of the U.S. economy.
Few nations emulated Canada's example of 11 consecutive budget surpluses heading into the Great Recession. And so the necessary stimulus spending to inject life into paralyzed economies worldwide has inflated already burdensome debt loads accumulated by less prudent jurisdictions than Canada, Australasia and a handful of others.
To cover their stimulus-related and other debt obligations, national governments are expected to borrow a staggering $4.5 trillion (U.S.) this year. That's almost triple the average for advanced economies over the previous five years.
Any hint that certain issuers of those government bonds and other borrowings are flirting with deadbeat status will jack up the interest rates bond-buyers will demand. That could easily lift the general level of interest rates worldwide. Which in turn would raise the cost of capital for businesses and individuals. And that would be a major impediment to economic recovery at a time when central banks are trying to keep their key lending rates at or near zero to encourage investment and job creation.
In order not to set off this "global debt bomb," as Forbes describes the plight on its latest cover, the EU and the better-off EU nations haven't much choice but to rescue Greece. Recalling how the failure of just one New York brokerage, in September 2008, turned a local banking problem into a full-blown global crisis, EU officials now regard Greece as "Europe's Lehman Brothers."
A coordinated EU bailout of Greece, spearheaded by Germany, would defend the value of the euro. It would bolster an EU whose reputation would otherwise suffer from having abandoned one of its members. And it could stave off a currency and debt crisis that would likely be a worldwide spectre.
Indeed, it's difficult to imagine any other scenario – repugnant though it is, especially to the fiscally austere Germans – than to "reward" a fellow EU member for its chronic incompetence in managing its national finances.
Ever since the Lehman collapse, Europeans have been a little smug about how an inadequately supervised Wall Street tipped Europe and most of the rest of the world into the worst economic slump since the Dirty Thirties.
Now the tables are turned. For a decade the EU gave Greece a pass on its consistent failure to come even close to meeting the EU's own benchmarks for budgetary prudence. If there is to be a second global economic crisis, its origins will be traced to European laxity, not asleep-at-the-switch U.S. financial regulators.
In Athens last week for a conference, Nobel laureate Joseph Stiglitz, a liberal economist, counselled against the austerity measures the Greek government has just imposed – including wage freezes, pension cutbacks and budget slashing across government departments. He cavilled against the "deficit fetish" for which the International Monetary Fund and the World Bank are notorious.
The compelling counter-argument is that global markets aren't as rational as Nobel laureates. They need assurance now that Greece will not become an insolvent Iceland. And that the EU will backstop Spain, Portugal, Ireland and any other EU member that has obligations outstanding to world banks, already undermined by losses on U.S. subprime, or junk, mortgages and other "toxic assets."
Even Stiglitz's fellow liberals on the Continent are insisting Greece "be helped with all the fiscal brutality" of which the EU is capable, as Germany's centre-left Suddeutsche Zeitung editorialized late last week. The EU "has taken the first step to putting the country under its control, and virtually deprive it of its sovereignty. This is the worst imaginable punishment for a nation."
And a necessary one, to preserve a still shaky world financial order.
