Greek debt woes turn into a global threat

The fear that began in Athens, raced through Europe and finally shook the stock market in the United States is now affecting the broader global economy, from the ability of Asian corporations to raise money to the outlook for money-market funds where American savers park their cash.

What was once a local worry about the debt burden of one of Europe’s smallest economies has quickly gone global. Already, jittery investors have forced Brazil to scale back bond sales as interest rates soared and caused currencies in Asia like the Korean won to weaken. Ten companies around the world that had planned to issue stock delayed their offerings, the most in a single week since October 2008.

The increased global anxiety threatens to slow the recovery in the United States, where job growth has finally picked up after the deepest recession since the Great Depression. “It’s not just a European problem, it’s the US, Japan and the UK right now,” said Mr Ian Kelson, a bond fund manager in London with T. Rowe Price. “It’s across the board.”
The crisis is so perilous for Europe that the leaders of the 16 countries that use the euro worked into the early morning Saturday on a proposal to create a so-called stabilisation mechanism int-ended to reassure the markets. On Sunday, finance ministers from all 27 EU states gathered in Brussels to discuss and approve the proposal.

Mr Elena Salgado, Spanish finance minister, promised to do “whatever is necessary” to set up a rescue mechanism for the embattled euro before markets open.
“We have to give more stability to our currency … We will do whatever is necessary to reach agreement among the 27 ministers,” said Mr Salgado. But so far, the finance ministers have been tightlipped what the measures will be.

Q What is the Greek financial crisis?
Greek’s financial crisis started in October last year when it said its budget deficit for 09 would be 12.7 per cent of GDP and its debt forecast for 2010 is 120.4 per cent of GDP. There was fear that the government would default. In return for being bailed out by the EU, IMF they had to undertake stringent measures that in turn led to domestic strife and turmoil.

Q Why has a bailout package taken so long, compared to Dubai’s troubles?
The Eurozone was divided over rescuing Greece. Germans for one felt it would be rewarding profligacy. The Arabs are a more homogenous lot and rulers have far greater freedom of action so Abu Dhabi came to the rescue of Dubai.

Q The Greek contagion is spreading. Will India be affected?
The Indian stock market has already lost about 1,000 points since the Greek crisis escalated. The inflow from FIIs to India is dwindling as they look for safer havens in gold and US treasury. Borrowing costs have already increased by two per cent after the global financial meltdown and in the coming months could be even more expensive as the risk appetite decreases.

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