The profligate Greek are being bailed out by a world that is worried about biting the bullet. A trillion dollars plus is being lined up to preserve financial peace in the world. The amount of the bailout is more than three years of GDP of the country! Change one alphabet from Greek and it becomes greed. The financial tragedy that is being played out, has a varied cast of players that include global banks that have lent moneys, the Euro currency that is at risk, and a general fear of the unknown that has prompted the IMF also to step in and undertake an unwarranted bailout. Whilst it is being bandied about that the sorry Greek will sacrifice a lot in future (like the proverbial naughty kid promising to be good from tomorrow), I am fairly confident that it will not happen and that the wicked ways will not be forgotten by the Greek. Domestic politics will not permit a lot of ‘promises’ or ‘undertakings’ to be fulfilled. Greece violated the EU's Growth and Stability Pact budget deficit criterion of no more than 3% of GDP from 2001 to 2006, but finally met that criterion in 2007-08, before exceeding it again in 2009, with the deficit reaching 12.7% of GDP. If one takes in to account that the population of Greece is around 12 million people, the magnitude of the bailout stands out as something of a monstrous aberration!
Greece perhaps got lost in its desire to catch up with the fellow Eurozone countries, who have a higher per capita income. With budgets getting unbalanced, friendly bankers helped out with borrowings. Now, it is payback time.
The tragedy here is that Greece left the world with a Hobson’s choice. Ignore them and the contagion spreads. Help them and it will only embolden other countries to continue with their wayward fiscal habits. The global banking system has taken the approach of pitching in, hoping that it will resolve the problem.
The relief is apparent if one looks at the manner in which the stock markets round the world cheered the news of the bailout, with a relief rally of immense magnitude.
To me, Greece is but one of the problem countries. In many parts of the world, domestic governments are throwing fiscal discipline to the winds, in order to ensure short term survival of those in power. Greed does not pay. Printing more money has its own consequences.
Stock markets today get daily cash flows of a magnitude not ever seen before. So, expect huge volatility to hit markets again and again. Whilst it is true that our Indian economy is less vulnerable to global economic conditions, our stock markets are not. Global funds are the driver of our stock markets. The way they move will be key to our markets.
If we assume the higher end of stock market analysts and assume the FY 2010-11 EPS for the Sensex to be at 1100, then the markets are already discounting it by nearly sixteen times. Surely, that is not a value buy. And, if we all agree that the Greek bailout is good for the world and that the world will heal, watch out for higher oil and commodity prices.
European economy and many other countries are still sitting on mountains of debt. A few more bailouts and the flight to safety will become pronounced. Safe havens will be commodities and gold. Emerging market borrowings will become costlier. In the next twelve months, eyes will be on Greece to see how they bite the bullet. Any let off and the country’s economy will match its ancient ruins.
India and Indians have a big lesson. Debt helps you to reach your aspirations sooner. The trick is to know when to stop. It is difficult to stop when you have global bankers who thrust ‘deals’ down your throats, hoping to make their commission and walk.