COULD whoever accidentally sat on the universal remote and rewound us to late 2007 please pass it over so we can resume watching 2011 again? Seriously, how else are we to make sense of the scenario in which Kevin Rudd is again mounting a campaign for the prime ministership and financial analysts are warning of a looming debt-driven global recession?
Let’s begin with the less intractable of the two problems: the Greek debt crisis.
While many people recall the collapse of Lehman Brothers in late 2008 as the beginning of the global financial crisis, in fact sharemarkets began to slide in late 2007 on early signs of an implosion in the US subprime mortgage market. As the tide of cheap international credit ebbed, several European nations were exposed as swimming near-naked, borrowing beyond their means.
The Greeks were among the most scantily clad, using accounting tricks to cover the fact they had let government debt spiral to about 150 per cent of gross domestic product, well above the 60 per cent threshold for continued membership of the European Union.
The Greek economy has now shrunk 10 per cent from its peak in 2008 and prospects for recovery
are grim. Concerns about a Greek
debt default continue to give sharemarkets the jitters.
The Greek Prime Minister, George Papandreou, this week won a vote of confidence in his new parliament. But attention is focused on whether he can pass a planned €78 billion ($106 billion) package of budget cuts and tax increases through parliament next week. A deal is needed to secure continued emergency funding from the European Union and the International Monetary Fund so the government can keep paying its bills come early July.
So even as the Greek economy flounders, wage earners could be slugged with a ”solidarity levy” of 1 to 5 per cent of their income in a bid to return the budget on a course towards black.
There are broadly three paths ahead for this Greek debt crisis.
In the worst-case scenario, the government will be unable to secure further emergency funding and will default on loan repayments to its largely European creditors. These, including large German and French banks, will in turn suffer losses that could fan out across Europe and the world, triggering another seizure of the global financial system. Not good.
In the second scenario, the government will pass legislation to reduce its budget deficit and secure a second bailout package from the EU and the IMF, limping onwards to pay another day. But this very austerity, including spending cuts and tax increases, will likely knee-cap the Greek economy for years, if not decades, to come. Generating the economic growth needed to grow tax revenues and pay off debt could prove a very long and slow process, with plenty of scares and close calls to come about whether Greece will default on its debts.
The third option, which European authorities seem unwilling to countenance – yet – is for a negotiated restructuring and writing off of some of the Greek debt. This will mean losses for the European banks with loans to Greece, and investors in those banks. Deciding what level of loss could be shouldered without triggering another credit freeze will be a big ask. But the other two options are hardly palatable.
As for Rudd, well, no solutions easily present.
THE IRVINE INDEX
Outstanding loans to Greece from European lenders at the end of last year, according to the Bank for International Settlements.
Anticipated value of the entire output of the Greek economy this year.
Size of the Greek population.
Fall in Greek economic output since its peak in September 2008. Further decline is expected.
Size of the first Greek bailout by the European Union and the International Monetary Fund. Another bailout of similar size will soon be needed.
Proposed cut to the tax-free threshold for Greek wage earners, down from €12,000 to €8000.
Size of the proposed Greek austerity package, including tax increases, over five years.
Size of the Australian economy.
Proportion of income that top income earners in Greece could be forced to pay as a “solidarity levy”.
Sources: bis.org, imf.org, rba.gov.au, ANZ Research note.