Financial Crisis in Greece and Its Effects in Australia
Several economies and stock markets around the world are feeling the burns of the Greek financial crisis that has been escalating over the last few days. The consequences in Australian stock market also warrants notice as about it has lost about $35 billion already. All ordinaries and both the S&P/ASX 200 have all fallen by about 2%. The Australian dollar had a lower value against US cent and was trading at 76.3 US cents this week. The Australian stock market is reacting very fast to the troubled situation in the talks between euro zone and IMF creditors and Greece. Though Australia is not directly linked with the financial crisis in Greece, people have lost confidence in the market and the situation does not seem to fare well for other global markets like Japan’s Nikkei, South Korea and Indian stock markets as well. A brief overview of the Greek financial crisis will help you understand these consequences in better light.
What’s happening in Greece?
Since the first attack of recession felt by the Greek economy in 2009 it has been piling up debts which the country has no means to payback. At present it owes about 242 billion euros to lenders that include IMF (International Monetary Fund), the ECB (European Central Bank and other Euro zone governments with Germany as its biggest creditor.
The series of misfortunes faced by the Greek economy started in 2009 when it was found that they were understating their deficit figures. This blocked their borrowing in the financial markets and by 2010, Greece was already on the verge of bankruptcy. To help the declining Greek economy, the IMF, The ECB and the European commission issued two bailouts. But the help was conditional and brought few harsh terms that the Greek government had to agree with. Tax evasion was to be eliminated, government deficits were to be reduced and businesses were to be given more freedom. But the money was not used in building up the Greek economy but was used up in paying their debts.
This has led to some disastrous situation that is inevitable for Greece to default on at least some of its loans. It has already declared its inability to make the 1.6 billion euros payment to the IMF that was due by this Tuesday. If the country is unable to reach a favourable deal with the creditors soon, Greecemay have to decide to either leave the Eurozone or declare bankruptcy, it would cause economic instability which will have a ripple effect throughout the world.
As of now, the condition in Greece seems to be worsening as banks were closed this Monday which were barely surviving from the emergency credit from the European Central bank. Unemployment rates have soared high with an overall unemployment rate being 25.6 %.
In short Greece is presented with two choices; both that does not give it a happily ever after. If Greece chooses to stay in the Eurozone, it will have to enforce certain conditions that include austerity and cuts on public funding. On the other hand, the people of Greece are already fed up on the pay cuts and austerities that they fiercely go against any such move made by the government to pay its debts. If the government wants to use a new currency drachma and leave the euro for a while or permanently, the country will have to go a long way before it can achieve stability. There will be high inflation, everything will be valued half its original value, imports will become super expensive and things will become harder for Greek entrepreneur. But there are chances that the new currency could actually help the country get back in form in the long run. But there are very few who support this idea.
A referendum is to be held in July 5 in Greece to vote upon whether Greece should stay in the Eurozone or not.
How does it affect Australia?
Australia is not directly affected by the crisis in Europe. As Australia does only very little direct trade with Greece, it is somewhat in a better position compared to Europe and Asian countries. But the effects have created an instability in the Australian economy through the indirect channels like share market, banking, dollar value and consumer confidence.
The Australian Stock Exchange experienced some of the worst days recently due to the Greece crisis. As the most of the companies present in the Australian share market are not domestic and exposed to international situations, the values are dropping very rapidly.
If Greece is unable to pay its debts, there will be a credit squeeze as banks will stop lending to each other. This will affect mortgage rates and the RBA will be eventually forced to cut rates.
The financial crisis has had a severe damaging effect on consumer confidence levels, which does not seem to go up even after lowering of interest rates. As the financial condition in Greece worsens, retailers and specifically the construction industry are losing valuable consumers.
Similar to the share market situation, the value of the dollar is also affected as investors will avoid dealing with risky currencies. This happens despite interest rates being cut as investors will try to choose only the safest investments over currency.
But some people do benefit from the lowered dollar value as they can secure long term contracts and get a better margin. This can be highly useful for exporters and retailers as people will choose to buy locally.
There is also a chance that the Australian dollar will be driven up as investors who lose faith in the Eurozone may consider Australia to be an attraction.
A crisis in Europe need not deter you from entering into business or carrying on with your daily activities. While it is good to keep an eye on what’s happening outside and how it affects the local market, you should focus on maintaining your cashflow and continuously look for ways to keep your business up and going.