The AMP’s chief economist, Dr Shane Oliver says the Greek debt debacle, along with worries about increased bank regulation and Chinese tightening, has the potential to contribute further to a correction in shares in the short term.
But he believes that it is unlikely to seriously threaten the global economic and share market recovery.
Greece is an extreme case in terms of its public finances, the risks are better known than with sub-prime, Greece is very small and so far there is no sign of any flow-on to the debt of key advanced countries.
Dr Oliver says equities were due for a correction but the underlying backdrop remains favourable.
It seems the Greek debt saga won’t go away.
No sooner than it looks like it’s resolved it keeps degenerating into high drama once again.
The latest iteration has been triggered by another upwards revision to the Greek budget deficit, ratings downgrades, more worries that assistance won’t be forthcoming from Germany and intensifying worries that Greece can’t deliver on its promises to cut its deficit or may default.
Of course there is a degree of self fulfilling insanity to all this because the more investors panic and push up Greek borrowing rates, the greater the likelihood that Greece won’t be able to deliver, and so the more investors panic!
The bottom line is that the resultant panic has pushed Greek 10 year bond yields up to nearly 10% which is more than three times above German levels.
Bond yields in other “at risk” countries such as Portugal and Spain have also been pushed up and share markets have fallen in the last few days on worries the debacle will threaten the global recovery by forcing more countries in Europe to adopt austerity measures and by destabilising the Euro.
Many fear this is just another iteration of the global financial crisis in the making, with another financial meltdown just waiting around the corner. So what are the risks?
There are several points to note.
Greece is a special case
The table below shows budget deficits and public debt levels relative to GDP for OECD countries and key emerging countries.
The first chart below page shows essentially the same thing in graph form.
What is apparent is that Greece, along with a few other countries has an extreme budget deficit and public debt position relative to its GDP.
What’s more, it is regarded as covering up the size of its budget deficit, was running big deficits before the Global Financial Crisis, and arguably hasn’t been quick enough to respond (unlike say Iceland and Ireland).
In addition it doesn’t have much track record in reducing its deficit in the past (unlike the US, UK and Portugal) and doesn’t have stable domestic debt holders like Japan.
The public debt blow out
While investors are now fretting about Portugal, Spain and Italy (maybe because it’s too late to sell Greek debt at such high yields) it’s worth noting the public finances in these countries are in better shape than Greece.
The risks are better known with Greece than sub-prime
Despite Greece’s dodgy public finance stats, the risks are far better known than was the situation during the Global Financial Crisis when financial institutions baulked at counterparty risk because they didn’t know what sort of sub-prime CDO related risks they might be getting exposed to and no one really understood the risks anyway.
In the case of Greek, Portuguese, etc public debt, the exposures and risks are far more transparent.
Interestingly 25% of Greek public debt is held by Greek residents and the bulk of the rest is held by European financial institutions, notably in France and Germany.
US banks have little exposure.
Greece is small and unlikely to be enough to derail the global recovery Greece is only 2.6% of Euro area GDP and Portugal is just 1.8%.
What’s more, the Greek tragedy has been hitting the headlines since late last year and despite this both consumer confidence and business conditions in the Eurozone have been rising solidly.
In fact business conditions readings in the Euro-zone are quite close to US levels and both are at or around normal cyclical highs.
It looks like the weaker Euro is having a positive impact outweighing the bad news from Greece.
More broadly, the news on the global recovery has continued to improve over the last few months despite the Greek news.
This is most noticeable in the US and Asia where the economic recovery seems to be getting stronger.
So far there is no sign of concern regarding high public debt levels in key advanced countries
The more significant concern regarding public debt relates to the US, UK, parts of core Europe and Japan and we remain of the view that it will be a medium term constraint on growth in these countries.
However, at this stage there is absolutely no sign of any investor panic spreading to these countries.
In fact, long term sovereign bond yields have fallen so far this year in the US, UK, Germany, France and Japan, partly due to a flight to safety from
