Greek Problem – Potential for Sizeable Correction World Markets
May 8, 2010
Greece, one of the great tourist destinations for all of us is in great problem. Much has been talked about its Sovereign Debt coming up for payment and the country with empty coffers is unable to take the next step. Lets have a deeper insight into the problems of Greek.
How is Current Greek Crisis Different ?
First, the previous Greek administration under reported fiscal spending. Following the change in the Greek government in October last year, the fiscal 2009 budget deficit-to-GDP ratio was massively revised up, to 12.5% from 3.7% (it came in at 12.9%). This is what triggered the current crisis.
Greece’s currency is the Euro. Countries that have recently experienced financial crises, such South Korea and Russia, as well as those in Northern Europe and Southeast Asia, have all seen their currencies plunge. This time however, Greece cannot on its own engineer a fall in its currency, the euro, and its terms of trade versus other euro member states are unlikely to improve.
With Greece’s outstanding public debt only accounting for 2%-3% of EU GDP, if it receives adequate support, the problem is at a soluble level. However, conditions remain opaque as to whether this is a realistic scenario.
2010 Greek public debt outstanding will amount to €292.1bn (approximately ¥30trn). Much of the outstanding Greek public debt is held by banks in Germany [DAX] and France [CAC 40] . There is thus a risk that a hefty haircut could significantly impair the capital of European banks. Of course, as with the 2008 international financial crisis, there would be an option of injecting public funds into affected banks. However, this would mean the people of Germany and France shouldering the burden of Greece’s debts. While this might be practicable in economic terms, it would not be politically impossible.
In all probability, the upshot will be some combination of international support, ECB monetary easing, and haircuts on Greek public debt. Near-term, we are forced to conclude that there is potential for big correction in share prices around the globe. The main reason is that while from the March 2009 low to the April 2010 high, global equities rallied a massive 79.9%, the correction so far has been modest.
The Stock Market Correction Till Date:
From the April high to the 6 May low, the US 7.6%, Europe 9.5%, India BSE SENSEX – 7.08%and emerging markets 7.1%, which one cannot say is substantial given the gravity of the situation (the world is down 7.2%). The TOPIX fell by more than 10% at the time of the Dubai shock in November last year.
Outlook for Markets in the context of Greece:
The question of whether the uptrend in global equities will implode or not will be settled by the fundamentals of the world economy. We feel it would be only natural to go through a correction of around 10% or 20% over two or three months.