Tuesday, 22 December 2009

The importance of Greece

To a casual observer, you may not even have noticed the problems that are afflicting our fellow Europeans, Greece. This is a country whose long socialist and corporatist rule has led it to a terrible financial position. Public sector wages and the size of the public sector is high. They have a huge military for an imaginary war with Turkey and a corrput private sector that pays very little in the way of tax.

As such their bonds have been under huge pressure, unable to make the grade so to speak the ratings agencies (still trusted I see despite the debacle they made of sub-prime) have started to downgrade Greek debt.

The Greeks have now, Ireland style, settled on a policy of mass austerity to try and cut out the danger of a default and of being kicked out of the euro.

The importance of Greece though is that in 2010, the issue of Sovereign debt will dominate the global news. the US, UK, Japan and virtually all major countries are trying to issue too much debt. If the great recession does not gently peter out (which is the most optimisitc view one could take), then Government debts are going to be the number one story.

Also, if these debt issues get out of control they are being used as a marker the major investment banks to mark a bnig sell-off in Stocks and shares around the world.

Greece might seem like a small country with problems far away, but they could soon be our problems and are set to dominate the agenda at home in the run up to the election.


Demetrius said...

There are many problems in making comparisons between one state and another. This certainly applies to a collection such as Greece, Ireland, Spain, Japan, USA, and the UK. Whilst the four first may look worse in many respects, the last two have so much hidden and off balance sheet that they may in fact be much greater risks. So which could be in for the nastier experience? Answers on a reused Xmas Card to 11 Downing Street.

Budgie said...

State debt is indeed the defining financial problem of 2010 - and the next decade. I despair at the insouciance of our political class towards this problem.

We are borrowing from our future selves in order that Brown can continue his delusions. He is in fact defrauding us with our own (tax) money and then defrauding us again with our future money. Brown's stupidity in action.

CityUnslicker said...

D - yes it is hard to compare, but my point is that the markets are watching this very closely. A default in Greece will see a FTSE sell off on a major (2009?) scale.

Also a domino effect will come into play, as it did with sub-prime.

Budgie - very eloquent, I agree with every word.

Budgie said...

CU - a question: Why will a Greek default result in a FTSE sell off? I genuinely don't understand.

Surely when governments default, and government money becomes dodgy, people flee to assets such as property and shares (ie something productive that counters inflation) rather than cash?

Agreed if they think the whole system will collapse they flee to gold, jewels, food, guns etc, so I can see a share sell off in those circumstances. But are you saying the whole Western economic system will actually collapse because of Greece?

Steven_L said...

A sell off? Will this include Minerva? What's the crack on Minerva, I'm getting tempted by the chicken switch now it's doubled so quickly.

CityUnslicker said...

Budgie - because the trading banks think it will domino to the UK. UK assets will be seen as risky, money will go to more stable economies like Germany and Canada.

SL- nothing ever wrong with booking a profit. There may be a slide when the offer expires - or a jump if a new offer comes in...

Budgie said...

CU - so what can someone like me (small savings, retail) do? Shares no good; cash no good? Gold? Food?

Sebastian Weetabix said...

You could always change your money to Swiss francs. They usually hold up pretty well!

Anonymous said...

SW: "You could always change your money to Swiss francs."

I think it may be different this time round for Switzerland, many of their banks are in poor shape too at the moment.

My thought was Norway. They are outside the Euro zone, they have a very large soveriegn wealth fund set up for just the sort of eventuality we are seeing now.

Any other takers?

Monevator said...

I agree, government bonds are going to be the big story for 2010. I wouldn't be surprised to see 10-year gilts at 6% by the end of the year. (I'm expecting more towards the 5% end though).

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