Will Europe Catch The Grecian Flu? February 6, 2010Posted by Yilan in EU, European Union, Yunanistan.
Tags: EU, Europe, Greece
Highly interconnected banks raise the risks of economic contagion.
That’s what happened in Asia in 1997, when Thailand devalued its currency and immediately revealed the huge exposure Japanese banks had to that once-booming economy. The crisis rapidly spread to Korea, Indonesia and other countries as borrowers found it impossible to repay foreign currency-denominated loans despite heroic efforts by the International Monetary Fund to contain the damage.
// France’s Credit Agricole, for example, owns Emporiki Bank in Greece, which dragged down earnings in the first nine months of 2009 by 843 million euros as the Greek unit struggled with loan losses and a restructuring. Greek borrowers will only find it harder to repay their loans if the country imposes higher taxes and cuts spending to try and pay down its mounting government debt. German, Austrian and Swedish banks such as RZB, Swedbank and Erstebank also have exposure to troubled Eastern European countries, according to Creditsights, a debt-analysis firm.
The European crisis does lack surprise, one of two elements found in most cases of contagion, Reinhart says. In Asia in 1997, and Mexico a few years earlier, the contagion was more virulent because it caught lenders and investors unawares. In Europe, Greece, Portugal, Spain and Italy–rearranged, they’re known as the PIGS–have been flagged as having potential trouble repaying sovereign debt for more than a year.
But European Union authorities, and more prosperous France and Germany, still have a big problem as the PIGS face higher interest rates on the debt and mounting difficulties rolling over debt held by foreign investors. The latest round of fears were heightened Wednesday after Portugal sold fewer 12-month notes, and at higher interest rates, than expected.
The wealthier nations in the E.U. can try to rescue Greece, Reinhart said, “and therefore avoid what they view as a really dark outcome for the E.U.”
“But the Europeans don’t have unlimited resources,” she said. “If a queue forms, they can’t help everybody.”
Reinhart and Rogoff worked together at the IMF in 2001, when Argentina went through a similar financial crisis and ultimately defaulted on its debt. The difference, Reinhart said, is Argentina’s crisis was like the Gabriel García Márquez novel Chronicle of a Death Foretold. The nation had such a long history of fiscal mismanagement, and was in the intensive care ward so long before the 2001 default, that international lenders had long since pulled out of the country to the extent they could.
That’s not an option in Europe, where banks have loaned freely across the continent and can’t easily extricate themselves. The best hope is a credible attempt by the Greek government to cut spending, raise taxes, and pay down its debt, she said. Turkey did this in 2001, she said, but Greece may have a tougher time convincing investors it’s serious.
The country last emerged from default in 1964 and has repeatedly revised its debt figures upward during the current crisis.
“The credibility problems we’re seeing here are combination of plainfaced lying and a long history of mismanagement,” Reinhart said. “The longer this goes on, the more the surprise element erodes, but you come out of this with very little faith in what the authorities are saying or doing.”