A Greek crisis could impact China’s market

By Liang Haiming Source:Global Times Published: 2017/2/22 0:28:39

Illustration: Peter C. Espina/GT


While many are paying attention to US President Donald Trump's slew of executive orders and tweets, we also need to remain aware of the hidden dangers from Europe, especially regarding the Greek debt problem or even a fresh outbreak of Greece debt crisis, which could impact countries across the globe, including China. The yield on two-year notes in Greece inched close to 10 percent recently, the highest level since last June. On February 7 the IMF warned that "Greece cannot be expected to grow out of its debt problem, even with full implementation of reforms," and projected that the country's debt and gross financing needs will "reach around 160 and 20 percent of GDP by 2030, respectively, but become explosive thereafter." In addition, according to a Bloomberg report on February 8, "German Finance Minister Wolfgang Schaeuble ruled out a debt cut for Greece as a violation of European rules, saying the country would have to leave the euro area to do so."

Many people tend to believe that Greek Prime Minister Alexis Tsipras will adopt his old trick of threatening to leave the EU. But this time, circumstances are different. 2017 is destined to be a year full of uncertainties, and internal and external environments both are disadvantageous to solving Greece's indebtedness.

Internally, Greece's debt-to-GDP ratio stood at 179 percent, and along with its deteriorating fiscal situation, Greece has had to rely on funds sent from the IMF and its EU creditors over the past eight years.

In addition, the country is plagued by challenges in its narrow tax base, vulnerable financial supervision and obstacles when conducting structural reforms, and as a result its economic recovery has not only fallen below expectations but the economy faces the risk of a sharp growth decline in the future.

Externally, Donald Trump has vowed to improve relations with Russia, and it remains unknown how the EU will react to threats posed by Russia. Furthermore, the ongoing Brexit process as well as elections this year in Europe render the political landscape more unpredictable.

Against the backdrop of volatile situations at home and abroad, Greece's debt issue has become a major hazard for this year's global financial markets. Whether Greece's EU creditors will confront the obstacles together or look to their own interests and simply ignore the Greek debt issue is uncertain.

What's more severe, in my opinion, is that even though the EU is willing to offer Greece another round of debt relief to stall a debt crisis, those indebted EU nations have voiced the intention of withdrawing from the union. That scenario would push the euro to the verge of collapse. Letting the euro fall to pieces would further hit international financial markets, including China.

Though burdened by the previous European debt crisis, governments in the eurozone seem to be hiding from it and hope to cover the issue by introducing negative interest rates and quantitative easing, leaving the unresolved problems for Europe's next generation.

But these methods could backfire. Negative interest rates by the European Central Bank were meant to increase loans to enterprises to boost the economy. However, the availability of loans from banks to firms would require considerations of profits, risk appetite and liquidity appetite. As a result of lacking faith in economic prospects, the risks of bank loans becoming bad debts cannot be underestimated.

Furthermore, per past experience from the US and Japan, pushing for further monetary loosening was effective in saving a financial crisis but didn't help stimulate the economy. Monetary easing could make heavily indebted European countries even less motivated in tightening policies but rely on "easy money," rather than cut expenses to pay off debts. This method would only gradually increase the risk of another crisis.

In this respect, the money-printing method in the EU would put the euro in a perilous state.

If the above situation continues, the euro is likely to split into two currency unions where strong economies with light debt such as Germany and France use one currency and weak economies and severely indebted ones like Greece and Portugal use another, "currency B". If their debt situations were to deteriorate further, some of these weak nations may even withdraw from the eurozone and restore their home currencies.

Adopting "currency B" or restoring old currencies would make these countries' assets and liabilities fail to take into account the euro value of other financial instruments. This may destroy their balance sheets and bring financial shocks into the global markets. China, as well as other nations, will not be able to avoid the impact, and this could induce unprecedented challenges to Chinese firms who have ambitions in going global and seek investment opportunities in Europe. Hence we need to think and take precautions.

The author is the chief economist of China Silk Road iValley Research Institute, a Guangzhou-based think tank. bizopinion@globaltimes.com.cn


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