Vang SJC

The hot issue that the market is most concerned about now is the Greek debt crisis and Grexit, and how it influences the Eurozone?

Greek sovereign debt was 175.1% of GDP in 2013 , the second in the top countries that are over head and ears in debts, just behind Japan (227% of GDP). However, Japanese debt does not cause serious influence as Greece because they have the ability to repay. Unlike Greece, Japan has full rights with their own currency. 95% of Japanese government bonds was held by Japanse banks, while 75% of Greek debt are from foreign financial institutions.

Causes of the debt crisis in Greece comes from many years of “living beyond their income” before the 2008 economic crisis broke out and destroyed the global economy; rampant tax evasion and avoidance, lack of transparency in accounting (scandals about “fake” budget deficit), the most “generous”pension system and social welfare in Europe, and a low savings rate.

Since joining the eurozone in 2001, the Greek budgets has never met the eligibility for entering the eurozone: the budget deficit below 3% of GDP, public debt not exceeding 60% of GDP, and inflation below 3%.

After the 2008 crisis, the ECB has had to “pump” money into the system in order to unlock the frozen capital flows, and stimulate growth. At the same time, eurozone countries had to carry out reforms to reduce budget deficits and public debt. Until now, many countries of the eurozone have escaped recession and began to recover with lower unemployment. Only the Greeks are on the brink of insolvency.

Greek problem is spending too much for an unwieldy system of civil servants, social welfare burden is increasing as the population is aging rapidly. In the context of global economic crisis, Greek economy that depends mainly on tourism and transport is under heavy destruction. But Greek people do not saving or working like nor their diligent neighbor: German, causing personal net assets of Greece lower. This is their own problems not all eurozone.

Unlike Greece, Spain’s public debt comes from the bubble in real estate market (like the financial crisis originating from the US property) and high unemployment rate in young people, unattractive with highly-skilled workers. Meanwhile, as the 3rd largest economy in Europe, Italian public debt is on the world’s top 10 but with lower risk of default thank to the financial stability control with high savings rates, good manufacturing sectors.

If Greece still insists on keeping its policy, the possibility for Grexitis is very high , because Germany would not make concession. The Grexit may be not-too-bad news for the eurozone in the long term, cause this area is no longer attached to the stubborn black hole Greece anymore. Regarding fears of Grexit Domino effect, other indebted countries like Italy, Spain, Portugal would be wise enough to not follow Greece when reforms are working. Secession means the country must return to their old devaluating currency with hyperinflation, investors’ declining confidence like Greece. In the long term EUR will go up when the European economy is showing signs of recovery.

In fact, at the moment Greece was actually kicked out off the blocks as the Central Bank of Greece is no longer connected to the source of the money anymore, so Grexit now is only an official statement or not, Eurozone economy will not be impacted significantly.

U.S. viewpoint: U.S. economy has not completely erase the traces of the economic crisis yet and are facing competitive pressure from the emerging China, threatening to U.S. number 1 position. Until now, the US has always watched on the sideline of Greek debt talks. Except for one time President Obama called for mutual inderstanding and urged Greece and creditors to quickly reach a consensus. US does not want to let Greece go. Grexit will make others doubt about the connection and integration of currency onion, a weaken eurozone does no good for U.S. as EU is U.S’s biggest ally. To protect Greece and its European allies against the Asian emerging economies (China, India) and new union Russian-Chinese, temporarily, US can print money to buy Euro to maintain a reasonable exchage rate, supporting the competitiveness of US exports, amid dollar is too strong. EUR may go up in the short term.

At the same time China has ambitions to internationalize the renminbi, aimed directly at the position of the dollar. So first of all China has to pass the Japanese yen, British pound and euro of a weakening EU. On May, China has once again suggested the IMF recognizing their yuan as a strong currency and put it into the SDR. If the yuan is really included into SDR at the end of 2015, the position of the currency will be strengthened remarkably. U.S. needs to help eurozone protect the value of the euro, strengthen the counterweight of Euro with other financial areas such as Hong Kong, China, Singapore or Japan (on recovery) and Russia (on coming back). But the help of the United States only has limited effect, long term outlook for Euro could be threatened.

Conclusion: If the negotiations generates positive outcome with the bailout disbursed, political uncertainty is erased, the euro will rise. If Grexit occurs, EUR will go down in the short term, but in the long term as eurozone economy recovers and the euro will bounce back again.

Ban Mai