Tuesday, June 21, 2011

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

First part: Greece Debt Crisis and Bankruptcy have effects on Asia - Part 1.
Q: How would Greece bankruptcy effect us in Asia?

A: There are a lot of horror stories in circulation in the economic news about immediate effect of a Greek debt restructuring (a nicer way to say bankruptcy). In fact most of them are circulated by the investors to create a "to big to fail" environment to be bailed out.

Greece bankruptcy will start what is becoming highly inevitable earlier: Sovereign Debt Crisis of The West. Instead of solving the root causes of the problems, The US and European governments reacted the financial crisis of the first 10 years of 2000s by transferring losses to public whenever a private financial institution got itself in trouble.

Asia over relies on US and Europe as consumers to consume their products. Asian countries production capacity is in a state that resources are allocated based on Western over consumption. This is a typical result of credit fueled over consumption: resource in Asia (and in anywhere else in the world are misallocated). Mix of Asian products are not completely consumable by its citizens. So any problem in US and Europe will translate into trouble in Asia. But it may also well be a chance. It would be very painful at the beginning but the pain can force Asian nations to start to upgrade their inter-Asian trade and infrastructure instead of parking all the savings in US.

But there is a very immediate and damaging effect of a potential Greece default : European banks which has heavily leveraged on Greek debt will see a large chunk of their capital melt and they will have to pull money from everywhere, including Singapore, back to home. This has potential to dry-up cheap credit fueling all sorts of asset bubbles in Singapore, particularly the property bubble. 

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