By: Mike Campbell
With the Euro hovering above a four year low against the Dollar, it is probably appropriate to turn to the country that triggered the slide in the first place: Greece.
The markets, be they stocks or financial, are skittish beasts that are easily scared, reacting often on little more than rumour, supposition and fear. When it emerged that previous Greek governments had badly misrepresented the state of their financial position to allow them to enter the Euro, it could hardly have come at a worse time. The incoming Greek government gave a truer picture of the real situation and it eventually emerged that the nation’s deficit was over four times the permitted level and the country had huge debts. This confession, whilst no doubt good for the Greek soul, came amidst the worst financial crisis that the world has seen since the Great Depression; a time when governments around the world were forced to inject funds into their economies to ward off a global financial meltdown. Ratings agencies queried the ability of Greece to honour its debts; downgrading them to “junk” status and the financial markets responded by demanding cripplingly higher returns on Greek government bonds, the vehicles used to borrow money. The cost of servicing Greek debt rapidly became prohibitive forcing the Eurozone to agree to a safety net with the IMF that would be rolled out if Greece couldn’t reasonably service her debts through the market. Greek will get the first tranche (€20bn) of the €110bn loan today, enabling her to honour her financial obligations.
Greece and other heavily indebted Eurozone nations (notably Portugal and Spain) have announced austerity measures to resolve their debt crises, but markets have reacted badly because of fears that the measures will stir up public unrest and may hamper the recovery in those countries and the wider EU. But the very thing that triggered the current Euro crisis was the magnitude of the sovereign debt problem; servicing and reducing it. It seems to be a case of “damned if you do and damned if you don’t”.