Global Markets have been fretting and perspiring about Greece going bankrupt for some time now. I am amused and surprised on why markets and media are so hyper on the prospect of Greece going bankrupt and exiting European Union .Let’s get this into perspective. Whats the big deal about Greece going bankrupt? Greece is just 2% of Europe GDP and <0.4% of world GDP. Its trade is <0.3% of world trade. With GDP of $242 Billion , its 43rd biggest economy in the world.
Bangladesh and Pakistan is almost the same size as Greek economy ($150 & 240 Billion GDP). Would the world give the same attention if Bangladesh or Pakistan had gone bankrupt? Then why we are fretting about this one? Why is the prospect of Greece default such a big nightmare when we had bigger economies like ASEAN nations and Argentina going the default way earlier and recovering strongly?
The answer lies in few factors like world economy and financial markets becoming much more integrated than ever before and Greece being an integral part of the European Union with one single currency.
The financial markets have never been more integrated and coupled because of seamless flow of information, hot funds(hedge & FII) and cross country investments. A sneeze in US markets leads to pneumonia in European and emerging markets and Vice-versa. Whenever there is a big negative event , these floating funds and investments become risk averse and flow back to so called “safe heavens” like USD($) and Gold. This in turn leads to havoc for all the asset classes and markets , especially equity markets.
European union is a weird amalgamation of nations which has achieved currency and monetary union with no political and fiscal union. The nations are practically free to pursue their fiscal plans with high budget deficits and debts without much restrictions from the European Union or ECB. Consequently many nations(Primarily the PIIGS – Portugal, Ireland, Italy, Greece and Spain) spent their way to prosperity for many decades till they landed up in the current situation. All these expenditure was funded through sovereign debt issue which was readily lapped up by European banks and other European governments.
Greeks are themselves to blame for this impending tragedy . They have been far too lazy, and have been stupidly spending their money for decades on large welfare schemes and pensions , funded by European banks and governments. Everybody gets pension there at age of 57 years with as many as 450 so called “ hazardous” professions including hairdresser getting pensions @50 years. Everybody has entitlements of free health care, education, unemployment, housing etc just because they are Greeks . Governments have run big deficits , running into double digits(in %) as they have huge expenditure with no additional sources of revenue as the population is greying fast and working age population is declining. The concept of welfare states are boomeranging on Europeans. Investors and bankers are going to start focusing on excesses of other PIGS countries like Portugal, Spain and Italy once the dust settles on Greece.
However , a big silver lining in this dark clouds is that Greece is not Lehman. First of all, its economy and trade is quite inconsequential for the world because of its size.. Secondly, when a similar Greek debt crisis had started in 2010, all the European banks which had big exposure to Greek treasury bonds were ring-fenced against such storms by allowing them to sell their Greek bonds to ECB(Central bank). Out of $240 Billion of Greek govt. bonds today, hardly $40 billion is with private banks. Remaining debt is being held by other governments like Germany, France, Italy and Spain, IMF and ECB.Besides, all the European banks have been recapitalized few years back to take care of such situations. Hence there is very low probability of Banks freeze and financial meltdown like Lehman and hence low chances of contagion effect. Only chance of contagion effect causing widespread damage is incase there is a run on Spanish or Italian banks also or incase traders start shorting Italian and Spanish Treasury bonds causing big spike on their yields. However chances of such events would be very low as ECB would be ready to intervene like our RBI, as they are much wiser after 2010 Greek crisis and 2008 Lehman crisis. Hence there is very low probability of a contagion or snow balling impact on financial systems and markets, giving a devastating blow which will be felt for a long time like 2008 financial crisis . At worst , there will be a good amount of volatility in the markets for few weeks/ months ; after that business as usual , as markets adjusts to the possible consequences of the unfolding drama which could lead to Greece exit from EU.
We have a Greek referendum this weekend when Greeks are going to decide their destiny by Voting “Yes” or “No” to the tough austerity proposals demanded by EU/ECB as a condition for extending future bailouts. Its a very tight race with latest opinion polls predicting a close tie with Yes and No votes at 43% each with 14% votes confused and sitting at the fence. These fence sitters would most probably determine tomorrow which way the vote will swing. Markets participants, central banks and governments all over the world are hoping anxiously for a Yes vote so that Greece remains in EU and future bailouts and emergency cash continue to come in.
For retail investors like us in India , I would advise that load your cash guns full so that you are ready to fire with full blast when you see sitting ducks(great businesses at discounted price) due to market volatility/panic dips and over-reaction due to “No” vote or bank run in Greece which might happen next week or Greek exit from EU. All these events would be short term in nature and sentiments driven with no fundamental impact on long term India growth story and corporate earnings of domestic economy driven businesses. In medium term , Indian markets and stocks will be influenced more by fundamental factors like Monsoon, reforms and Corporate earnings than Greek crisis. Exploit the potential market madness to your advantage and buy great businesses at every dip in market due to panic/over-reaction with a long term perspective(at least 3-5 years).