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Greece … there has been a lot of noise, a lot of commentary and you have probably (for the most part) heard enough when it comes to Greece – we will keep it brief.
Greek PM Tsipras has announced his resignation and the country is now headed for another election (September). While Greece and the Eurozone have agreed on a third bailout program the IMF is likely to insist that Greece’s debt burden is reduced before participating in the bailout with a decision due in October. Collectively this is causing short-term nervousness.
How does the crisis affect the global financial system? In our view: negligibly.
Since Greece’s debt crisis began in 2010, most international banks and foreign investors minimised their risk by selling down their Greek bonds and other holdings. (Some private investors who plowed back in, betting on a comeback, probably regret that decision now). And in the meantime, the other crisis countries in the Eurozone (Portugal, Ireland and Spain), have taken steps to ensure their economies are much less vulnerable to market contagion than they were a few years ago.
Why does the Eurozone keep fighting to keep Greece?
Europe has put up safeguards to limit contagion, Greece is only a tiny part of the Eurozone economy and arguably the region would be better off without a country that constantly needs it’s neighbours’ support – the answer therefore, is not so concerned with economic policy, but rather the controversy reduces to power politics.
Leaders realise acquiescence to the Greek government’s demands would set a precedent for every other country that might wish to challenge the strictures of the European Union. This
would send a message to voters in Portugal, Spain, Italy and so on, that making enough fuss, and electing extremist parties, results in sweeter deals. It advises other countries that they can borrow as much as they like, walk away from their debts and make the rest of Europe pay the bill: intransigence results in reward.
A ‘Grexit’ would also involve a legal minefield that no country has yet ventured to cross. There are no provisions in place for departure, voluntary or forced. Despite the frustration of endless negotiations, European political leaders see a united Europe not as a ‘nice to have’ rather an imperative.
For years now, it has seemed to any reasonably informed outsider that something in Greece would have to give. Surely, in a democracy, an economy cannot continue in depression for five plus years, without citizens demanding change, consequences be what they may. Herbert Stein, a US Economist influential in his time once wrote:
If something cannot go on forever, it will stop.
How true this is. Greece has succumbed, but it is doubtful that they are the only nation running up against ‘Steins Law’, albeit for different reasons.
Using Greece as a base case the following article takes a closer look at those economies whose days of reckoning could be imminent, if their set course does not take on an alternative trajectory.
Greece succumbs to Stein’s law by Michael Collins, Investment Commentator at Fidelity