Greek Euro crisis hits Asia

By Terry Lacey

(February 19, Jakarta, Sri Lanka Guardian) The Greek financial crisis threatens to drag the EU back down into a “double dip” recession. (Sean O´Grady, UK Independent, 13.02.10). This comes alongside continuing doubts on the Dow Jones report of a 60-percent Dubai World debt deal (Guardian 14.02.10) and the downward slide of the US dollar. Asian economies are nervous of the combined effects of a euro and dollar fall and perhaps oil price rises.

Indonesia has shelved plans to issue Euro bonds. "The euro bond is defintely not on our minds" said Rachmat Waluyanto, director general of debt management at the Indonesian finance ministry, referring to negative sentiment caused by the problems facing the PIIGS group of EU states (Portugal, Ireland, Italy, Greece and Spain).

The Asian recovery led by China, India, Indonesia and ASEAN is based on local consumption and powerful state backing, but cannot hit the high road to full recovery, pulling the Middle East and developing world with them, without improved global demand.

The Eurozone countries are caught between a rock and hard place, to launch a financial rescue of Greece against their will and beyond their means, or to possibly watch the PIIGS crash instead of fly, and bring down the Euro with them.

Greece needs to refinance two lots of sovereign debt amounting to more than €8 billion each in April and May, (Reuters and The Jakarta Post 17.02.10). How is this to happen without concrete EU support leading to sustainability, rather than solidarity without substance ?

Greece only represents about 3 percent of the Eurozone gross domestic product, but the disproportionate doubts that threaten the Euro reflect fear of contagion and increased focus on flaws at the heart of European monetary union (Financial Times quoted by Gulf News 14.02.10).

“Behind this intense focus on Greece is the long-standing unresolved issue of how to enforce fiscal discipline in a currency union of sovereign states,” says Thomas Stolper at Goldman Sachs.

Morten Hansen, an economist at the Stockholm School of Economics in Riga, Latvia questions the determination of Latvian Prime Minister Valdis Dombrovskis to join the Eurozone, “Should they go into a zone where there are countries not following the rules and then have to bail them out ?” he asked. (AP and Gulf News 14.02.10).

Constantin Gurdgiev argued in the Irish Sunday Times that “given Greece´s performance over the past 15 years – persistent huge deficits and a creative presentation of official data to conceal them – about the only surprising thing in the country´s unfolding drama is that its bonds will still trade at all.” (Sunday Times 07.02.10).

The reluctance of Germany to lead a bailout was led by Wolfgang Schauble, the German finance minister, “Greece has to realize that, when you break the rules over a long period of time, you have to pay a high price.”

Temporarily the British can rejoice they did not join the Eurozone. But the UK has tried to finance its way out of recession by a huge state-backed spending spree, resulting in a government deficit at a level not seen since the second world war.

The British pound has been steadily losing value to the Euro and the recent drop in the Euro does not herald the end of this trend.

Henry Chu writing in the Los Angeles Times points out the British economy is shakey with a yawning budget deficit as a proportion of gross domestic product, alarmingly similar to that of Greece , whose 12.7 percent budget shortfall is four times beyond the prescribed limit for Eurozone countries.

UK Prime Minister Gordon Brown argues this Greek tragedy is only being played out in the Eurozone theatre.

But the US and UK counter-recession spending sprees also carry a price that has to be paid. The UK austerity program has to start just as the British face a general election.

From the Germans Greece can expect hard advice but no concrete measures, and from the British tea and sympathy, to which the French may add a freshly baked croissant. Perhaps a little more is needed.

Where does this leave China, India and Indonesia ?

As tea-producing nations perhaps they also need to send tea and sympathy to their European aunties, hoping that they will make a full recovery from this second round of coughs and sneezes, before everyone catches another cold.

Terry Lacey is a development economist who writes from Jakarta on modernization in the Muslim world, investment and trade relations with the EU and Islamic banking.