Sent: 21-02-2012 14:03:04
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'Greek Deadline' could be new addition to English language
The term 'Greek deadline' should enter the English vocabulary as the definition of an infinite capacity to forestall the inevitable in the face of overwhelming evidence of imminent catastrophe. The concept may be saving the world from a global economic depression.
At one level, Greece is unimportant. It accounts for just 0.4% of global GDP and less than 3% of European output. If it had not been for the collapse of Lehman Brothers in 2008, the world might not have bothered about poor little Greece. Lehman scared every policy adviser on the face of the earth. The possible demise of Lehman seemed inconsequential at first, even desirable, until its unexpected connections throughout the financial system became evident.
Worries about Greek living standards have paled into insignificance compared to fears of the financial contagion that might ensue after a Greek default on its debt.
There were two scenarios no-one wanted to permit. One was a default that sent ripples through the European banking system until a bank no one suspected as being at risk failed bringing other banks to their knees as the pressures were magnified. This could have resulted in a 1930s type of global depression.
The other scenario would have involved Greece stepping out of the European monetary system. This would have almost certainly resulted in a run on Greek banks and the collapse of Greek financial intermediaries. Political and social turmoil would have followed. This would have resulted in debt default in any case.
Summits between the French and German leaders, meetings between IMF and ECB officials, gatherings of European finance ministers and heads of government council meetings have come and gone for many months almost, it seems, on a daily basis. Another gathering of European finance ministers is scheduled for this week in a bid to nail down a course of action that would prevent either scenario being realised.
The question for the world economy is whether it is any better off for all the nervous energy that has been generated among the most senior politicians and bureaucrats in Europe.
The level of scepticism about the capacity of the Greek parliament to implement the austerity measures being demanded of its members is realistically high. Who knows what the composition of the parliament will be after elections in two months and how the new members will react to the austerity measures the rest of Europe is demanding.
Even embracing the current austerity program enthusiastically will leave Greece with a debt to GDP ratio of 120% in a decade. This is only on the borderline of sustainable, at best.
Perhaps Greece will have to quit the euro in due course and perhaps the Greek people will have to withstand a decade or two of extreme economic hardship as they depend on international aid to survive, much like Haiti or other similarly impoverished nations.
The good news is that we are facing a 'Greek deadline'. None of this has to happen now. It might be in nine months or a year. In 12 months, it might still be six months away.
The passage of time has helped. European officials should now have a far clearer understanding of which financial institutions are holding Greek debt (and every other form of debt). Those whose exposures might have threatened financial viability have been given breathing space to quit the positions and utilise the various safety nets now in place to buttress their capital bases.
Officials, including those at the IMF, have had a chance to plan for an emergency, if one should arise. There is now a possible pathway that was not evident two years ago when the European debt mess first loomed.
The seemingly inevitable failure of the Greeks to set their economy on a sustainable growth path this time round may result in further revaluations of the country's debt or even a real debt default if the government walks away from all its outstanding obligations.
Given long enough, even that outcome could be accompanied by a global equity market rally because the uncertainty will have been removed and we will be relieved to see that the system has, more or less, coped because of how long it had to prepare, thanks to a 'Greek deadline'.
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