Greek mess may cause second GFC | News.com.au
THE dire situation in Greece has the potential to cause a second global financial crisis and we all need to factor in that possibility along with the impact of the fallout on our finances.
In recent months we've been keeping you up to date with the PIIGS (Portugal, Italy, Ireland, Greece and Spain). These are the economic cot cases of Europe that need bailing out of their financial woes.
Greece is the most at risk of failing and global financial markets are on tenterhooks at the risk of this triggering a domino-style collapse of the rest of the PIIGS.
We're being bombarded with questions about Greece, so here are the answers.
>> Why is Greece in such a bad way?
Basically, Greece is full of tax cheats. Its workers are overpaid and can't be fired. In other words, Greece has been living beyond its means for years. The Government has borrowed heavily and been on a spending spree it couldn't afford.
For example, public service wages have increased 30 per cent in the past five years. It's common for workers to be paid a bonus just for arriving on time, and industrial relations laws mean it's almost impossible to be fired. Crazy stuff.
On the revenue side, tax evasion is a national sport with some estimates that 25 per cent of the working population pay no tax, costing the Government about $30 billion a year.
This means that the Greek Budget deficit is 14 per cent of GDP (what it earns). Australia's budget deficit is 4 per cent.
But the financial killer for Greece is the soaring level of its government debt, which is about 125 per cent of GDP. Ours will peak at 7 per cent.
Because investors are so nervous about the risk of Greece not repaying its debt, they're demanding much higher interest rates for any new loans.
Greece can't afford those higher interest rates and it has to refinance a big chunk of that debt in the middle of next month. That's why it wants a $20 billion pot of bailout money from the International Monetary Fund and stronger European countries soon.
>> What is their government doing about it?
Naturally the IMF and European Union countries aren't going to throw good money after bad, so they've said they'll help but only if the Greeks tighten their belt and get the budget back into shape.
So the Greek Government has announced a series of budget austerity measures, which are the cause of the public riots:
A pay freeze and some wage cuts for public servants.
Scrap wage bonuses.
Easier rules to lay off staff.
Tighten eligibility rules of the age pension.
An increase in VAT (its GST) from 21 to 23 per cent.
Lifting indirect taxes on alcohol, petrol and cigarettes by 10 per cent.
A clampdown on evasion of tax.
Privatisation of government businesses (telcos, power companies) and even selling some Greek islands.
The aim is to cut the budget deficit to less than 3 per cent of GDP by 2014.
But the IMF and European Union are withholding the $20 billion bailout for another month until these austerity measures are passed through the Parliament.
>> How will it affect us?
The European Union and the IMF have a finite amount of money to bail out countries. The fear is, if Greece defaults on its debts, the interest rate on loans to other PIIGS will soar to a point they could default and there won't be enough money to bail them all out.
It's a scary prospect. Yes, Europe is a long way from us, and we're more linked to the prosperity of China and other Asian nations, but we won't be immune from another global financial crisis.
Just like the last GFC, global share markets could crash, ours will follow and that will hit all our superannuation returns.
Banks globally are big investors in European government bonds. If some of those countries (such as the PIIGS) default on their debts, those bonds won't be repaid, the banks will suffer big losses and they'll tighten credit to customers.
This will cause another credit squeeze, which will hit all economies not a pretty prospect.The IMF and EU are determined to stop Greece triggering the fall of dominoes.
Let's hope they succeed. Follow it closely.
