Monday, June 20, 2011

Greece Debt Crisis and Bankruptcy have effects on Asia - Part 1

Here in Singapore we are a little far away from Europe so people do not follow Greece Debt Crisis a lot. In fact this is a very serious issue which will greatly effect us and global markets. A Greece bankruptcy will trigger a debt crisis which can be followed by Portugal, Spain, Ireland and Brussel debt crisis. Europe is a very large customer of Singapore produced goods so if Europe falls into crisis, we will directly feel the pain.

So what is happening? Will Greece bankrupt? How did they come to this point?

Q: How did Greece fell into debt crisis?

A: When Greece entered EU, she suddenly found itself among group of rich relatives, particularly Germany. Guys who were lending financially sound Germany offered the same interest rates to Greece (probably thinking that Germany would help Greece when Greece cannot pay). And as expected financially unsound Greece abused this new situation: Greece borrowed heavily in the last decade to fund ever negative government budget and current account deficits.

These two paragraph below summarizes what has happened in Greece in the last decade:
Over the past decade, Greece borrowed heavily in international capital markets to fund government budget and current account deficits. The reliance on financing from international capital markets left Greece highly vulnerable to shifts in investor confidence. Investors became jittery in October 2009, when the newly elected Greek government revised the estimate of the government budget deficit for 2009 from 6.7% of gross domestic product (GDP) to 12.7% of GDP. In April 2010, Eurostat, the European Union (EU)’s statistical agency, estimated Greece’s deficit to be even higher, at 13.6% of GDP. Investors have become increasingly nervous about Greece’s ability to repay its maturing debt obligations, estimated at €54 billion ($72.1 billion) for 2010. On April 23, 2010, the Greek government requested financial assistance from other European countries and the International Monetary Fund (IMF) to help cover its maturing debt obligations. This report analyses the Greek debt crisis and implications for the United States.
The debt crisis has both domestic and international causes. Domestically, analysts point to high government spending, weak revenue collection, and structural rigidities in Greece’s economy. Internationally, observers argue that Greece’s access to capital at low interest rates after adopting the euro and weak enforcement of EU rules concerning debt and deficit ceilings facilitated Greece’s ability to accumulate high levels of external debt.
Greece’s Debt Crisis: Overview, Policy Responses, and Implications

Q: But why Greece needs to borrow heavily?

A: Welcome to the root cause of Greece debt crisis. Think of Greece everything opposite of Singapore in the context of economy. The network of economic activities are highly corrupted in Greece: its citizens and companies do not pay tax and nothing happens to them when they do not pay tax! So they have low state income in the first place (just an example: 1 third of the doctors in Greece pays less tax then construction workers). People are not hard working, they retire early, earn a lot of money for producing nearly nothing and nearly all economic activities involving government also involves bribe. An example: All parents in Greece buy private tuition for their kids since they well know that in Greek schools teacher teaches nothing useful but teachers are relatively paid high and if their unionized wage increase request is not accepted, they strike (Strike is a national sport in Greece).

If you earn less but spend a lot, you borrow to fund your spending and repeat this again and again, you will bankrupt. This is true for individuals, companies as well as countries.

Notice: Greece tends blame The Ottoman Empire on the practice corruption. Ottomans occupied Greece for decades until Greek Independence and according to Greeks they have inherited the corrupt practices from them. They are partially right to look at the history but it is not The Ottomans, it is Roman Empire. The Ottomans also inherited their corrupt practices from Roman Empire after they have ended it. Actually, highly established corrupt economic practices of Roman Empire can still be seen in 3 modern day countries occupying its land now: Greece, Turkey and Italy.

Q: So is it all Greece's fault?

If your brother-in-law spends more than he earns again and again and goes broke, it is his fault. But if every time he needs money, you risk your money and financial stability by borrowing him a lot of money with the unrealistic expectation of getting it back or your father will step in and bail your brother-in-law if he cannot pay, it is also your fault. This is not only Greece's fault. The lenders who opened this reckless spending nation credits are equally responsible for the crisis.

Q: Will Greece bankrupt?

A: It is now pretty obvious that Greece will bankrupt.

Q: So what is all the fuss about Greece?

A: All the fuss in the market is on when and how Greece will default. As usual, investors who had wrong bets and lend money to Greece do not want to pay for their mistakes. Instead, again as usual, they want to be bailed out. They want IMF and EU taxpayers (read this as Germany and German taxpayers) borrow money to Greece so that the bankruptcy is delayed until end 2012. If they can achieve this, Greece will pay them their money and they can exit their wrong bet. Typical banana republic economic practices adapted by the west for the last decade: "Tail we win, heads you lose". They plan to offload debt to taxpayers and yet again profit from trade.

Part 2: Greece Debt Crisis and Bankruptcy have effects on Asia - Part 2

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