The European and euro crisis shook world markets in late April 2010 with the menace of two possibilities: Greek sovereign debt default and the collapse of the euro.
With barely three weeks to go before a possible Greek debt default in May 2010, German political leaders and the IMF hesitated to grant a huge aid package to Greece without firmer commitments on austerity measures and public spending reduction. IMF Director, Dominique Strauss-Kahn, warned Greece that to get the aid package in place there would need to be a commitment to “painful” restructuring in the Greek economy. The Greek government, meanwhile, was facing public demonstrations and political opposition to the cuts in living standards demanded by European and IMF lenders as the price of aid.
With neither the austerity plan nor the aid package in place, markets panicked and shares fell around the world. The FTSE fell 1%, Japan’s Nikkei was down 2.6% and Hong Kong’s Hang Seng fell 1.5%. Wall Street’s Dow Jones Industrial Average lost 1.9% during the same day. The fragile euro also fell against the dollar.
Contributing to the European and euro crisis, centred on this Greek tragedy, are fears that Portugal is fast following in the debt-ridden footsteps of Greece. Forecasters have suggested that Portugal may be the next euro zone economy to go cap-in-hand to European banks and the IMF. Even worse, the debts of both Spain and Italy, while not as severe as those of Greece and Portugal, are also substantial and have highlighted the overall gap between the richer EU countries – and mainly Germany – and the poorer, less competitive members of the EU club.
As the talks between Europen and IMF lenders and the Greek politicians continued, Standard and Poor’s, a leading credit rating agency, downgraded Greek government debt to “junk” status. This meant Greece – despite its membership of the EU club and despite the euro – found itself on a financial par with Colombia and Azerbaijan.
Part of the problem in the crisis has been the unreliability of Greek numbers – the Greek debt mountain has kept on growing as economists and lenders have peered more closely into the abyss. Consequently, the IMF realised that its initial planned rescue package – £39billion – needed to be raised by around £9 billion. (£26 billion would come from EU countries.)
But that’s not all. Goldman Sachs’ economists chipped in to say that even those numbers were way out, saying Greece may need as much as an eye-watering £130 billion to avoid debt default.No wonder the markets are nervous and the euro fragile when no-one seems able to accurately diagnose the problem – that is, tot up the amount of debt – let alone solve it.
Much hangs on the outcome of the crisis. The threat of Greek debt default has already had shares falling around the world. It has destabilized and weakened the euro. And it undermines the borrowing power of other European governments who are busy, ironically, trying to spend their way out of recession.
It is certain that once the immediate crisis abates – if it can be contained – European leaders will reconsider the foundation of the single currency, based as it is on politically independent countries which – all too evidently – can drag one another into a general crisis. This domino effect was exercising the minds of forecasters, political leaders and investors alike in late April 2010:
“The fear is that Greece and Portugal are just the appetizers” explained Lorraine Tan, who directs Equities Research at S&P in Singapore. “The concern is it is going to spread.”
Erik Nielsen, the chief European expert at Goldman Sach’s agreed:
“In the short term, it’s not inconceivable that the IMF will need to get ready for another euro zone case in the coming months [of 2010].”
The euro’s bumpy ride continues.