The Greek debt crisis could spread panic in financial markets across Europe and beyond, experts warned today.
There is market talk of a potential global contagion, similar to what happened after the investment bank Lehman Brothers collapsed in 2008, contributing to a deep global recession.
"Greece as an economy is tiny but the danger is contagion and market panic," said David Wyss, chief economist at Standard & Poor’s in New York.
"If people get scared that Greece could default, they are going to be scared that Portugal will default and then other countries. Once people panic, they panic about everything. We saw that in the wake of the Lehman Brothers failure."
Markets worldwide have been shaken by a wave of bad news from Europe, starting with a downgrade of Greece’s heavy debt load and then downgrades of the debt held by Portugal and Spain.
In Asia, there are not yet significant concerns about the creditworthiness of the region’s governments but big economies like China and Japan still have much at stake.
Europe is an important export market for both and their manufacturers are counting on sending ever more goods to the continent. China and Japan are also among the biggest investors in the debt issued by other nations, the US especially, with holdings worth hundreds of billions of dollars.
Some lenders in the region, meanwhile, are already worrying that Europe’s problems will chill the financial system, making it harder for banks to borrow the short and long-term money that helps fund their own lending to businesses and consumers.
There are also concerns the turmoil in Europe could convince China to delay any appreciation of its currency - widely viewed as undervalued - aggravating tensions with the US and other trading partners.
Nariman Behravesh, chief economist at IHS Global Insight, a US forecasting firm, said the challenge will be for the International Monetary Fund, the world’s lender of last resort, and other European countries to come up with a rescue package credible enough to convince financial markets that authorities are determined to limit the spread of the problem.
Economists note that countries that endure banking crises often end up having debt crises a short time later. That is because governments borrow heavily to prop up their banking systems, which sends their own debt burdens soaring.
"The Greek problem highlights a broader problem across the globe," said Mark Zandi, chief economist at Moody’s Economy.com. "Governments used their resources to end the financial panic and the Great Recession, but now they have to figure out how to pay for it."
China’s government reports its debt at about 20% of GDP. But Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates, says the figure is far higher than official numbers suggest. Add in local government debt and non-performing loans in the government-owned banks, and the level tops 50% of GDP, he said.
The European turmoil, however, may compel Beijing to postpone any moves to allow its currency to rise until the international outlook is clearer.
China has tied its yuan to the dollar since late 2008 to help its exporters compete amid weak global demand. Washington and others complain that keeps the yuan undervalued, giving China’s exporters an unfair price advantage and swelling its trade surplus.
While Asia appears strong enough to avoid the debt problems engulfing Greece and Europe, it has not been immune to the anxiety the turmoil has produced. Asian equity markets have been hammered this week, in line with deep share declines in Europe and the US
