Young Investor

IN THE LIMELIGHT: GREEK TRAGEDY

ADARSH GOPALAKRISHNAN | Updated on September 24, 2011

The Greek debt crisis tops every investor's watch list for cues on the global market with borrowers on the hook for $566 billion. The very real possibility of Greece defaulting on its debt took its toll on two French banks which were downgraded a notch by Moody's. With discussions underway to lend another $70 billion to the country to roll over upcoming debt obligations, markets remain wary of what lies ahead.

GREECE ON THE EDGE

Reassurances from European economic biggies such as Germany and France that Greece would not be allowed to fall out of the European Union seem to have fallen on deaf ears.

Markets still remain sceptical over a Germany-led bailout; public outrage and the resultant government unwillingness in those larger economies could render a free pass to their profligate southern neighbour unlikely.

Investors have responded by betting that the probability of a Greek default is extremely high as the price of insuring Greek debt has soared to $6 for every $10 of the debt held.

Now, Europe and rest of the world specifically find themselves in a catch-22 situation where both Greek ‘bailout' solutions could prove painful. There are two immensely expensive options ahead.

The first is to allow Greece to stay in the currency union with a bailout and severe spending cuts. The second and an equally unpalatable option is to let Greece drop out of the Euro, float their own currency, and deal with their debt by themselves. The second also raises the spectre of moral hazard and the question of which country will be the next to drop the Euro to deal with their debt.

That list could be long and add to the Euro-zone woes.

And amidst this ruckus was an interesting Chinese angle.

The Chinese Sovereign Wealth fund was reported to be in talks with Italian officials over possible debt purchases. This followed the Chinese premier's comments that the Euro-zone ‘must get its house in order' before China can help out.

The indebted Euro-zone constituents may continue to clamour for a slice of China's $3.2-trillion forex pie. However, the extent and form of China's contribution remains unclear.

US TROUBLES

And even as the Euro-zone floundered in misery, there was little relief for investors looking at the biggest economic gorilla in the room for solace. The US had what can be mildly termed as a ‘headache' of a week. Unemployment claims and inflation levels came in at higher than expected levels, while regional manufacturing activity clocked in lower growth. This added to the increasingly loud chorus that the US may be headed for a painful second slowdown.

President Obama's proposed $447-billion ‘jobs package' which includes tax cuts, infrastructure spending and other spending provisions has met with lukewarm response from both the public and markets. His approval rating among voters plummeted and the S&P 500 has remained largely unmoved since his announcement. Obama is likely to face stiff challenges in the form of a recalcitrant opposition to his new plan.



Published on September 17, 2011

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