The Euro member countries with the highest levels of debt (Greece, Portugal, and Spain) have another problem that restricts their ability to fight their current economic enemies…the Euro.
Before the crisis, these countries experienced significant investment and a property boom resulting in strong economies and inflation that was higher than the other Euro member countries.
When the property bubble burst each government did what they had to do to rescue their ailing economies and borrowed funds to invest and take the place of the near-collapsed banking system. Unfortunately because they experienced higher inflation before the crisis, investment into these countries was less attractive than others during the crisis, and because of their attachment to the Euro, deflating their currency was never going to occur at the level required to aid recovery.
With Spain’s unemployment over 20%, and Portugal and Greece’s increasing to around 10%, paying out unemployment benefits is not getting any cheaper and thanks to the Euro, these countries not being an attractive place to invest will continue to place significant concern on their ability to repay their debt.
To be competitive again the only thing left for these countries may be years of painful deflation. Unfortunately, this also means many years of economic struggle but unfortunately is no respite for their debt problems.
Potential Consequences of a Greek Default
Whilst Greece is only a small part of the EU economy (it accounts for less than 2% in combined GDP of the sixteen EU member states) the potential default on its sovereign debt may have significantly greater ramifications…
- The largest holders of Greek Sovereign debt are the Greek banks. There has never been a time when an insolvent country has had solvent banks. It would be expected that the Greek banks will experience balance sheet losses resulting in a strong likelihood of a ‘run’ on the banks and their ultimate insolvency.
- As at September 2009, the Greek government had raised around $272B from other European banks. A default would result in potential significant losses on these bank’s balance sheets. The primary inter-bank relationships with the Swiss ($78.6), French ($78.9B) and German ($43.2B) banks. This may also result in more “bank runs” and insolvency concerns…more bailouts???
- There is the risk of a contagion effect that may flow onto other governments and banks resulting in a spike in yields and potential liquidity crisis. Other governments at most risk include Portugal, Spain, Italy, and Ireland who all have significant levels of debt. Both Portugal and Spain have recently received credit rating downgrades by Standard and Poors.
- This type of contagion effect could very well flow into another global credit crisis resulting in another slowdown in the global economy. Government bailouts a second time around surely would not be possible.
Without a doubt, this has been the worst investment sector I have ever seen. Apart from the overall dismal performance track record of this sector, a few years ago now we had the disaster of Saxby Bridge and their agri-boiler room sales tactics, and in the last 12 months we’ve had the collapse of Timbercorp, Great Southern and two days ago Forest Enterprises Australia (FEA).
Throw in that the biggest pusher of agr-MIS projects, Professional Investment Services (PIS), have withdrawn all agri projects from their APL thus placing enormouse sales pressure on the sector and its difficult to see what future exists.
I’m sure the government is dissatisfied with the lack of success and there would also have to be enormous legislative risk to this sector…for mine…obviously…agri-MIS is a tax effective way of losing money and a complete revamp of the sector is needed before this sector is worthy of anyone’s investment again!