The economic situation in Greece has taken a major downturn lately as a major ratings agency downgraded the Greek debt to “junk” status. What does this mean for the UK?
A Greek tragedy of epic proportions is being played out on the world stage at the moment. Instead of the usual “wailing women”, we are seeing a band of distraught financial markets reaching for the sell button. What is going on?
Greece has run up so much debt that it has now asked to be bailed out by the European Union and International Monetary Fund (IMF). Without rapid financial support, it is not an exaggeration to say that the country faces imminent bankruptcy.
As the largest European economy, Germany has previously agreed to provide the lions share of the bail out funds, but there is considerable opposition to this from German voters, who would rather see that amount of money being spent on helping the German economy.
There is a meeting being held with Germany’s finance minister and the president of the European Central Bank as I write, to decide if they will provide the bail out funds or not. If Germany decides not to provide the billions of Euros to help Greece, then expect to see major reactions in the financial markets.
What is scaring investors most, though, is the fear of contagion spreading throughout other vulnerable European Countries. Portugal, Spain and Italy have each had their ratings downgraded which means that investors are charging these countries higher rates of interest for their debt, as they are doing in Greece (which is currently being charged nearly 19%).
These fears are driving the Euro down and it hit its lowest point against the dollar for a year earlier. A weak Euro is good for British holiday makers, but a weak Eurozone economy is not good for anyone.
One of the problems for Greece is that it is trapped in a “Euro prison”, as I heard it described on the BBC today. Being bound by the constraints of the Euro, it cannot take any drastic measures such as currency devaluation or interest rate hikes, to resolve its severe economic woes. A price of its economic rescue may well be that a country such as Germany could force Greece out of the Euro.
What about the other weak countries such as Portugal, Spain and Italy? Will they need bailing out and then eventually be forced out of the Eurozone too?
Don’t forget that the UK debt situation is nearly as bad as that in Greece. Our National debt stands at 11.4% of GDP. I think Greece’s is around 12%. Our saving grace is that we have our own currency, are not part of the Eurozone and can therefore better determine our own economic fortunes.
Given the situation in Greece and the risks with other weak European countries, perhaps this is a time when we can thank those who kept us out of the Euro.
Updated 5.05pm
The Eurozone woes have just got worse as Standard and Poor’s, the leading rating agency, have just downgraded Spain to AA, outlook negative.
Jeremy Cook, chief economist, World First made this comment:
“Club Med has definitely had its time in the sun and I believe the market is getting ready to really test the ECB [European Central Bank] and IMF’s resolve. While Greece and Portugal make up relatively little of total EU GDP, Spain is a big hitter and accounted for around 9% of it in 2009. This will definitely get worse before it gets better.”
