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Greece is the word as markets hold their breath May 11, 2010

Posted by Yilan in EU, European Union, Yunanistan.
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What started in October last year as a Greek problem has morphed into a crisis that has the potential to trigger the next GFC, and there are good reasons why Australians should be worried.

Greek President Karolos Papoulias is not a man fond of understatements.

Earlier this week, as three people died amid fresh rioting in Greece, he warned that his country stands at “the edge of the abyss”.

He’s pretty much on the money too.

After lying to the European Union about the size of its financial problems for the best part of a decade, Greece must radically slash its debts. Failure to do so could jeaopoardise a 110 euro billion bailout agreed by the European Union.

As a result the Greek Government is rushing through brutal measures including raising the retirement age, boosting the Greek equivalent of GST to 23 percent and abolishing perks for public sector workers.

A series of general strikes have crippled the country this monthsince then and placed the government in a near-impossible position and the clock is ticking. Union leaders have pledged more action, warning that events overnight are just “the beginning of a long battle”.

Greece has a 9 billion euro debt repayment due on May 19 and if it misses that payment, it could default on its debts, an unthinkable outcome for world markets.

Some senior EU politicians are already comparing Greece to Lehman Brothers, the Wall Street investment bank that collapsed in September 2008, triggering the GFC and plunging many major economies around the world into deep recessions.

And the bailout is not a final solution.

“The bailout package simply lets stupid investors in Greek debt off the hook, replacing their money with funds from taxpayers around the world,” said Greg Canavan, market analyst and editor of Sound Money Sound Investments.

Markets are running scared that the Greek crisis will spread to other debt-laden European economies. Portugal’s credit rating has been cut and the International Monetary Fund was forced to deny rumours it would have to bail out Spain earlier this week.

Why should you care?

While the Reserve Bank of Australia (RBA) has said that the Greek debacle is unlikely to have an impact on Australia, others are not so sure. While our banks do not have direct exposures to Greece, there’s a real danger that the fear of contagion could send markets diving and introduce creeping paranoia about who is exposed.

Already, we’ve seen the Australian market following US and European markets lower as global worries take hold.

The fresh worries roiling global markets have also allowed Prime Minister Kevin Rudd to wheel out his favourite GFC sound bite.

“The global financial crisis ain’t over yet and we are not out the woods yet either,” he told reporters on Thursday.

ANZ bank boss chief executive Mike Smith warned earlier this month that there is a real risk of “everyone being tarred with the same brush” over the Greek crisis.

That creeping fear and paranoia will have direct consequences for Australians, particularly those with mortgages and small businesses.

Both Smith and Canavan warn that the Greek crisis could have a major impact on the cost of credit globally.

While that impact is likely to be felt in the long term, Australian banks source part of their funding for mortgages overseas and if the cost of securing that funding rises, we may see a return to the GFC trend for extra rate rises outside of official moves from the Reserve Bank.

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