By Tensing Rodrigues
To tell you frankly, I did not know Greece was a country in modern Europe till it was on the brink of bankruptcy. I thought Greece was buried in ruins of Macedonia before the Christian Era began. I grew up hearing about Greek tragedy, as my father taught European literature in those days.
Aristotle’s description of a tragic hero in his Poetics, was his favourite – passing through the stages of hamartia (the tragic flaw), anagnorisis (recognition of the flaw) and peripeteia (the ultimate fall) the Greek tragedy attains a “serious and dignified character and reaches a sorrowful or disastrous conclusion”.
Well, the tragedy of contemporary Greece seems to be quite following Aristotle. The problem in Greece began with its debt; quite like the US sub-prime mortgage crisis. Now it has a budget deficit of 13.6 per cent and debt equal to 115 per cent of its GDP. The country owes $226 billion to other countries, most of it to other countries in Europe. In itself Greece would not matter; it could have just disappeared like a tiny island in the ocean. But Greece is a part of the Eurozone; a default by Greece on its international obligations could snowball into a major European sovereign
debt crisis.
And that is exactly what seems to be happening at the moment. Interest on two year sovereign bonds has soared to 20 per cent, a rate that indicates investors’ perception of an imminent default. Rating agencies have downgraded the debts of Spain and Portugal in addition to that of Greece. Ireland and Italy could be the next in the firing line; UK may not be far behind, according to ratings agency Moody’s.
The UK government’s deficit is projected to be approximately 13 per cent of GDP in 2010, which is even worse than Greece’s 12.5 percent figure. Right now the public debt of the UK is at 68 per cent of GDP, up from about 40 per cent three years ago. It is now being projected that the public debt of the UK will exceed 100 per cent of GDP within the next three years. Morgan Stanley has already warned that there is a very strong probability that some of the rating agencies may remove the UK’s AAA status before 2010 is over.
Time alone will tell where the slide would stop; because, apart from Germany, no other European economy is strong enough to withstand the shock coming so fast after the impact of the US crisis. Portugal owes $286 billion to other countries, Ireland around $867 billion, Spain around $1.1 trillion and Italy a whopping $1.4 trillion. As BNP Paribas puts it “People worry that if Greece is Bear Stearns, Portugal is Lehman and Spain AIG.”
But the Greek tragedy may not remain contained in Europe; the tremors are now being felt across the globe. The US Dow Jones Industrial Average is tumbling slowly but surely. MSCI’s benchmark Emerging Markets Index has lost more than 10 per cent since mid-April. The price of crude oil has fallen significantly. Commodities, as measured by the broad Reuters Jefferies CRB index have lost too. Emerging market sovereign debt yields have blown out over US Treasuries. It is more than obvious that investors in riskier assets are pulling in their horns.
What could be the impact on India? We have already seen the impact on the Indian stock markets. But I do not see this as a reason to panic. We have seen this before, after the US crisis. In a globalised system we cannot remain insulated from what happens elsewhere. But that is only a knee jerk reaction. Over time the investors see reason and allocate their funds more prudently. The immediate reaction in such situations is to seek safety. But safety does not pay. So, when investors have time to think, they come out looking for profitable investments. This is what happened last time; and this is what is likely to happen this time too. India has practically no exposure to Greece; and has limited exposure to Europe. So the direct impact of credit squeeze in Europe would be limited. Once the sentiment improves we should see the investors returning. With both US and Europe living on ventilator, where else can they go looking for profitable avenues? India and the emerging economies of Asia, America and Africa are the most promising destinations. Patience is what is needed. And, if you have the guts, you can cash in on the
Greek tragedy!
