Greek tragedy on the horizon

2011-06-25 10:12

When South Africa’s first-quarter economic growth figures were ­released in May, they showed that the economy grew by 4.8%.

This was higher than any economist expected, and raised hopes for a solid performance for the economy this year.

But storm clouds have gathered and those hopes may be dashed.

Top of the list is the Greek crisis, which may be on its way to becoming a Greek tragedy.

The country has been plunged into a debt crisis and needs to implement more austerity measures before it gets more cash from the International Monetary Fund (IMF) and the European Union (EU).

Politically, the appetite for ­austerity is wearing thin, with ­protests on the streets showing how the Greek populace feel about the need to shrink the public ­sector.

The Financial Times reported that the IMF was blocking a critical €12?billion (R117?billion) aid payment to Greece just weeks ­before it was due, insisting it couldn’t go through without concrete assurances from European officials on a new Greek bailout.

The IMF, due to disburse €3.3?billion of the aid payment, is prevented from giving aid to a country that cannot pay its bills for the next 12 months.

Eurozone finance ministers have acknowledged that under the current €110?billion bailout, Greece will run short in March next year.

The IMF had been counting on the EU to come to the rescue, but there has been continuing disagreement between eurozone countries over the terms.

Meanwhile, Germany has been clamouring for private bond­holders to bear substantial costs of the new bailout.

Against that backdrop, the pressure is on for a depreciation in the euro.

If private bondholders are forced to take a loss, that could lead to a mini banking crisis in Europe, which could explode into a bigger crisis if Greece simply defaults.

If Greece doesn’t get the €12?billion tranche of its aid package, there will be a European financial crisis, which will spill over into the rest of the globe.

For South Africa, it will mean a sharply weaker rand, and the inflation associated with that.

However, oil prices are also likely to drop, so there should be some relief on that front.

If Greece’s fiscal problems aren’t enough, there are fiscal troubles in the US as well, where legislators are wrangling over the increase in the country’s debt ceiling – ­currently at $14.3?trillion (R97?trillion).

Congress has to approve the increase in the debt ceiling, which will be hit by August.

However, Democrats and Republicans have turned the debt ceiling into a tool for a deal on the US deficit (the difference between spending and revenue).

Democrats want tax increases to pay for a reduction in the deficit, while ­Republicans want spending cuts.

The chairperson of the ­Federal Reserve, Ben Bernanke, has warned that the country’s credit-worthiness is at risk if its borrowing limit isn’t raised.

He said that any delay in the US government making payments could cause chaos in global financial markets. He warned that it could also damage the dollar’s ­status as a reserve ­currency.

Bernanke said that he understood the desire of many politicians to use the deadline to force some necessary and difficult policy adjustments, but the debt limit was “the wrong tool for that job”.

If the debt limit isn’t raised, and the US reneges on payments, it would be logical for the dollar to weaken.

But markets aren’t always logical, and a US crisis could see the dollar strengthen, as it did during the subprime mortgage crisis.

However, it is more likely that the dollar will weaken.

This would mean a strengthening rand. Still, while US legislators may allow things to go down to the wire, it’s likely that a lifting in the US debt ceiling will be approved in time.

That Bernanke had to warn about it shows, however, how precarious the situation is.

The Japanese earthquake and tsunami have also had an effect, with local manufacturing production falling by a steep 3.7% month on month in April, bringing the year-on-year increase down to 0.4% from a downwardly revised 4.9% in March.

Sharp declines occurred in ­motor vehicle production, which was affected by the situation in ­Japan. The manufacturing figures do not augur well for local growth in the second quarter.

Another cloud on the horizon has been the Arab uprising, which has pushed petrol prices higher.

True, they are slowly moving down now, but according to the consumer price index, the yearly rate of petrol inflation was 16.3% in April.

Less dramatically, a cloud that has been hovering is the “soft patch” hit by the global economy in the second quarter of this year.

Indicators of industrial production and retail sales show the ­global economy isn’t in good health.

There were some fears of a double-dip recession, but these have now dissipated and there’s agreement that the world is going through a soft patch.

South Africa faces many of its own economic problems, of which unemployment is the ­biggest.

But there are clouds on the horizon from the global economy.

 Here’s ­hoping that those clouds will ­disappear.


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