Thursday, July 14, 2011

Eurozone Crisis

Lately, I have been doing some active reading into the Eurozone Crisis. Why should I be interested as I am barely exposed to the economic and monetary activities that happen over there. The short answer is that it will have significant impact with some violent swing on my portfolio valuation if the crisis escalate. I am not new to the unfolding of the unravelling of the economies on the southern peripheral of Europe having seen how it erupted in last June. I like to speculate on two key questions:-

1) Will Greece default? I think Greece will ultimately default as the debt relative to GDP is too large, the economy is contracting aggravated by austerity measures and a basically uncompetitive economy. The Greeks had too much of a good time for the most part of the earlier decade upon their entry in the Eurozone and now they are paying the price. I hope the EU will be able to engineer an orderly default to contain the spread of the crisis. Is this bad for us? Yes, it will shake confidence in the short run but I do not think the local banks are exposed to Euro bonds ie specifically Greek bonds. I still have the scenario of the Dubai default firmly imprinted on my mind. DBS was affected but not too a large extent. The Greek, French and German banks will have to borne the bulk of the haircut.

2) Will it spread to Italy and Spain? If these two are hit, I think there will be a big crisis on hand. For Spain, I really do not yet have a feeling on how things will turn out. But for Italy, I have a strong conviction they will get through. Italy deficit is relative small (about 4%), the debt to GDP still manageable though large, the banks have not gotten into the property bubble and more than half the debt are held by the Italian themselves. With some demonstrated will, Italy should be able to bring down the deficit, it should be able to scrap through. Italy for the record has been grinding on unspectacularly for decades plaqued by uneven growth rates between the North and South.

As a side note, the debt limit negotitation is basically a game of political brinkmanship play mainly by the Republicans. You get to see how stupid and ridiculous Americans can be!!!Maybe,you can say the same thing about us too.

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