Greece’s wrestling match with its sovereign debt is raising fears of default and financial market contagion around the world and threatening to tear a gaping hole in the euro.
Though the question of whether the country will be able to pay its creditors has been playing out for more than a year, fresh worries about the health of its economy were back in the spotlight Monday.
“Ultimately we believe that we’re going to see a default out of Greece,” said Beata Caranci, deputy chief economist at TD Economics.
The timing, however, is difficult to predict, she added. “There’s only one road out of this, and we’re taking the scenic route.”
Economists are warning of worse times still to come.
Greece’s debt problems won’t be solved quickly. Experts anticipate months of political wrangling over bailout and austerity measures which then drag down demand across the Euro zone and possibly North America and eat away at investor confidence globally.
In the U.S., the National Association for Business Economics, a panel of 52 economists, cut its growth forecast for this year in half to a measly 1.5 per cent from 3.1 per cent in the previous outlook.
In Canada, RBC Economics has slashed its GDP forecast to 2.4 per cent for 2011, down from 3.2 per cent initially estimated.
Markets throughout the world dipped sharply on Monday as investors priced in the growing likelihood of default. Only the Dow bucked the negative trend with a late-afternoon rally, taking it up 0.63 per cent at close.
If it feels like we’ve been here before, it’s because we have. Like the Greek myth in which Sisyphus was condemned to roll a boulder uphill for an eternity, only to have it roll back down each time, the country has embarked on another round of austerity measures, including government spending cuts and tax increases, meant to balance its books.
Among them, and sure to be wildly unpopular, is a two-year property tax that would range from 50 cents to 10 euros a square metre. The levy would be added to electricity bills to ensure collection and thwart tax evasion, apparently a national pastime in Greece.
But part of the problem is that these belt-tightening measures also slow the economy.
Greece’s finance minister warned Sunday that the country’s economy will contract by as much as 5.3 per cent, far more than the 3.8 per cent that was initially forecast.
“Greece has put through significant fiscal austerity measures but it’s not enough. The fact that its economy continues to contract at a faster pace than anticipated means they need more measures and that makes growth slow down further,” said Benjamin Reitzes, senior economist at BMO Capital Markets. “On top of that, protests have been continuing non-stop. It doesn’t help when the population isn’t willing to accept the measures needed to keep the economy stable.”
The euro fell to its lowest level since 2001 against the yen Monday, as speculation that German Chancellor Angela Merkel is preparing for a Greek default curbed demand for the 17-nation currency.
A growing chorus of economists believes that Greece may ultimately exit the euro. “The euro will survive. Whether Greece is in the euro is in another matter,” Caranci said.
The European Commission warned Monday that that Europe’s recovery is “fragile” and sovereign-debt levels will keep rising through 2012.
The lack of confidence and gloomy outlook are raising worries of contagion, financial troubles spreading like wildfire from one country to another.
In particular, investors zeroed in on three French banks, which are also among the largest in Europe. BNP Paribas, Société Générale, and Crédit Agricole, hold billions of euros worth of Greek bonds, and have been singled out by Moody’s Investor Services as candidates for a credit rating downgrade because they hold billions of euros’ worth of Greek bonds.
Greece has already received two bailout packages worth more than 200 billion euros, and there are signs that its well-to-do neighbours are growing weary.
Last week, Germany’s Juergen Stark resigned from the executive board of the European Central Bank said, suggesting policy makers are divided over how to fight the debt crisis.
Investors are now casting worried looks at other euro zone countries, notably Portugal, which is also likely to have a deeper-than-expected recession, Ireland, Spain and Italy, with its massive 1.8 trillion euro debt.
Canada has trade ties to Europe, but “the bigger impact would come through financial markets, not necessarily direct exposure to European banks, but our exposure to U.S. banks that are exposed to Europe,” Reitzes said.
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