On a more positive note, the Greek debt crisis perhaps can facilitate the realisation that there should be economic reforms for regrowth. Limited credit, supply shortages and soon-to-be hyperinflation reduces purchasing power though in the post crisis state, if the Greek output takes advantage of cheap labour and depreciation and becomes competitive, recovery can be experienced over a medium term. Meanwhile, the integrity of the Euro should improve once the EU establishes formal funding and exit rules given that Greece’s loans have been at low interest. Otherwise, other debt laden economies in the EU may cause the EU to disintegrate. Whether this is actually a positive thing in the long term comes back to the foundations on which the EU was built.
Despite there being few direct economic links between Australia and Greece, our currency should feel pressure to appreciate from investors seeking safe haven currencies. This presents a problem for the RBA given their present focus on currency depreciation through expansionary monetary policy, and further cuts (predicted at 25 basis points in August, before the RBA publishes the next set of growth forecasts) may aggravate the housing bubble through cheaper loans. This increases the risk of the collapse as furthermore the big four Australian banks source wholesale funding from the Eurozone which fuels our property purchases. However, as discussed later, it is the Chinese market that Australia should prioritise as a concern.
Investors are playing down their fears. Firstly, the risk that their default spreads beyond the EU is minimised by the fact that the debt is only 10% in the private sector and the European banks’ holdings of Greek assets are 80% less from their peak. The remainder of the debt are held by the IMF, ECB and governments, which are in better positions to absorb losses. Such disconnection from the financial markets stems from the restructuring of debt from 2012 where it was previously held by overseas investors.
Secondly, Outright Monetary Transactions, which involve the purchase of debt of vulnerable economies by the European Central Bank, has recently been ruled as legal. Furthermore their €60 billion per month bond purchase stimulus launched in March 2015 has guaranteed consistent demand for their debt. With the central bank playing such an active role in limiting bond market contagion from Greece, investors are more confident about the ability of the EU to protect itself. Greece accounts for 2% of the entire bloc’s output and growth has returned to the nations previously affected by the debt crisis.
Because of this, Sunday’s final round of bailout negotiations should determine whether the financial market contagion will shift towards a political one.
Wall Street Journal, Altair Asset Management, Financial Review