GREASE IS STICKY !!
Yes, this Greece is sticky too. And this troublesome glue could entangle India too.
Ancient Greece is the cradle of western civilisation. The land of Plato, Pythagoras, Homer, Aristotle, Socrates and many other famous souls, Greece, the land of Olympics, is today in great trouble. With the largest maritime fleet in the world and the queen of the blue waters of the Mediterranean Sea, Greece has a made a mess of its finances. It has a meagre $3.5bn as foreign reserves with public debts of over $400bn. Its staggering debt is about 125% of its GDP. With an economy growing at minus 2 percent, it has a work force of five million people and an unemployment rate of 9%.
Its economic crisis is Himalayan. With falling state revenues and increased government expenditure their economy is in shambles. Its credit rating has been downgraded to junk status making it almost impossible for the country to borrow any more. This country, a developed nation with a high HDI (Human Development Index) is threatening to tear apart member countries of the European Union (EU) and blow up their very currency, the Euro. The Greek crisis is directly threatening countries like Portugal, Spain and even Italy and Ireland. The story of Iceland is still fresh in our memories. Remember how Mr. Gordon Brown announced that the UK government would launch legal action against Iceland if about 300,000 UK savers were not compensated? Yes, there is a war out there with new financial weapons of mass destruction.
The world economy is trying to limp back to recover from the recent devastating financial tsunami ever, the epicentre of which can be traced to China. I am not blaming China. China with its aggressive economic plans and the ability to execute them well, grew at staggering rates, bringing a disequilibrium in the world economy. It flooded the world market with cheap goods because of economies of scale and a cheap labour force. This belligerence resulted in a gargantuan appetite for raw materials driving world commodity prices benefitting commodity exporters in Africa and Latin America. Oil prices boomed and city states like Dubai went on a borrowing spree to finance projects that were driven more by sheer greed and personal pride.
China built huge trade and balance of payment surpluses with major economies of the world. Tight fisted Chinese drew their domestic savings rate to ridiculously high levels. The Chinese invested this surplus in the developed world to over oil and grease the wheels of world finance which soon, running at higher than designed speed limits, slipped gears ultimately shattering the machinery, the riders and the onlookers like a ride gone awry in an amusement park. The US with zero household savings rate was a major beneficiary of this cheap money and they indulged in unbridled and reckless spending igniting the greed of shenanigans who are always looking for an opportunity to fish in troubled waters. It is a poker game with high stakes. The German Chancellor caught them unawares yesterday ( 19 May 2010) by banning speculators from short selling government bonds. The German Chancellor said “ The lack of rules and limits can make behaviour in financial markets driven purely by the profit motive destructive”
How did Greece get into this mess?
To put it simply, it is financial profligacy of the highest order in a new world that has dramatically changed as to how governments function in the wake of the recent world financial crisis. Deficit financing is how governments run their economies. But Greece has had perennial budget deficits running into billions of dollars. Its debt rose to 13% of its GDP. Greece continued to support loss making public utilities like the Olympic Airways, bestowed benevolent pension schemes, fooled a work force into believing that everything was hunky-dory ( it is reported that civil servants are able to retire at 40 and bequeath their pensions to their unmarried or divorced daughters). The Greeks also like many others revel in tax evasion and to add insult to injury, there are allegations that the government numbers are suspect. All these would have been buried if the world did not go into a financial spin and if the Greek economy had fared well.
The Greek contagion is not going to be contained even by the trillion dollar emergency fund announced recently. In the mad rush for growth, mounting government debts are no more sovereign. Not so long ago, Greece had A+ sovereign rating from S&P. There is too much borrowings in the developed world to funds welfare measures. Greece will access the costly bail out loans (with stringent conditions attached) to meet its immediate obligations in the fond hope that it will be able to extricate itself from the quicksand of this crisis . Bonuses to civil servants have been shaved, social security payments have been trimmed, state pensions have been frozen, taxes have been increased. These austerity measures announced by the government have angered the population who are taking to the street and burning banks. Trade unions are strong in Greece. A workforce that is used to a leisurely life will now have to swallow the bitter pill of austerity to avert another crisis.
If Greece is unable to get out of this crisis, then its ripple effect will traumatise Europe and the Euro. Many banks around the world will be affected once more what with their exposures through an intricate web of syndications. With countries in the Euro zone tightening their belt and Britain trying to rein its mounting debts, India’s exports to these countries will suffer. Japan too has an emerging sovereign debt crisis. Britain is heading for a debt crisis but its central bank is independent and therefore do not suffer from the rigidity of the Euro zone. The developed world is beset with a series of serious problems.
All this is not really good news for India in the long run. The impact is unpredictable although some vested interests may glibly brush aside the problem. The sad aspect of a sudden impact is that the average man on the street will not get any hurricane warnings. It will hit him hard and erode all his savings. The human tragedies of these manmade disasters are enormous.
The good news is that
The not so good news is that
And some of the bad news is that
Ruling a country like India and running its intricate economy is like flying a modern aircraft. Take a look at the cockpit of the Airbus – A380. Do you think a chopper pilot dare command it? Will you board this flight? Will the airline have the nerve to put a puny pilot to do the job? Take a look at the people who are running our governments. Barring a few capable leaders (you can easily count them on your fingers), do the rest of the flock inspire any confidence? By a conspiracy of happy accidents we have (and had) a few smart team of people who have so far steered this country out of trouble. We may not be so lucky for ever. The writing is already on the walls. Many of our senior and performing bureaucrats are getting older and I am disturbed to hear what is being whispered into my ears about the quality of many waiting to be pushed up. If Greece can get into this mess, we too can by our sheer complacency and lack of anxiety and alacrity. Of course God can help us again and again and again. Ignorance may be bliss and you can quote Socrates “I am the wisest man alive, for I know one thing, and that is that I know nothing”. God bless India.
Ancient Greece is the cradle of western civilisation. The land of Plato, Pythagoras, Homer, Aristotle, Socrates and many other famous souls, Greece, the land of Olympics, is today in great trouble. With the largest maritime fleet in the world and the queen of the blue waters of the Mediterranean Sea, Greece has a made a mess of its finances. It has a meagre $3.5bn as foreign reserves with public debts of over $400bn. Its staggering debt is about 125% of its GDP. With an economy growing at minus 2 percent, it has a work force of five million people and an unemployment rate of 9%.
Its economic crisis is Himalayan. With falling state revenues and increased government expenditure their economy is in shambles. Its credit rating has been downgraded to junk status making it almost impossible for the country to borrow any more. This country, a developed nation with a high HDI (Human Development Index) is threatening to tear apart member countries of the European Union (EU) and blow up their very currency, the Euro. The Greek crisis is directly threatening countries like Portugal, Spain and even Italy and Ireland. The story of Iceland is still fresh in our memories. Remember how Mr. Gordon Brown announced that the UK government would launch legal action against Iceland if about 300,000 UK savers were not compensated? Yes, there is a war out there with new financial weapons of mass destruction.
The world economy is trying to limp back to recover from the recent devastating financial tsunami ever, the epicentre of which can be traced to China. I am not blaming China. China with its aggressive economic plans and the ability to execute them well, grew at staggering rates, bringing a disequilibrium in the world economy. It flooded the world market with cheap goods because of economies of scale and a cheap labour force. This belligerence resulted in a gargantuan appetite for raw materials driving world commodity prices benefitting commodity exporters in Africa and Latin America. Oil prices boomed and city states like Dubai went on a borrowing spree to finance projects that were driven more by sheer greed and personal pride.
China built huge trade and balance of payment surpluses with major economies of the world. Tight fisted Chinese drew their domestic savings rate to ridiculously high levels. The Chinese invested this surplus in the developed world to over oil and grease the wheels of world finance which soon, running at higher than designed speed limits, slipped gears ultimately shattering the machinery, the riders and the onlookers like a ride gone awry in an amusement park. The US with zero household savings rate was a major beneficiary of this cheap money and they indulged in unbridled and reckless spending igniting the greed of shenanigans who are always looking for an opportunity to fish in troubled waters. It is a poker game with high stakes. The German Chancellor caught them unawares yesterday ( 19 May 2010) by banning speculators from short selling government bonds. The German Chancellor said “ The lack of rules and limits can make behaviour in financial markets driven purely by the profit motive destructive”
How did Greece get into this mess?
To put it simply, it is financial profligacy of the highest order in a new world that has dramatically changed as to how governments function in the wake of the recent world financial crisis. Deficit financing is how governments run their economies. But Greece has had perennial budget deficits running into billions of dollars. Its debt rose to 13% of its GDP. Greece continued to support loss making public utilities like the Olympic Airways, bestowed benevolent pension schemes, fooled a work force into believing that everything was hunky-dory ( it is reported that civil servants are able to retire at 40 and bequeath their pensions to their unmarried or divorced daughters). The Greeks also like many others revel in tax evasion and to add insult to injury, there are allegations that the government numbers are suspect. All these would have been buried if the world did not go into a financial spin and if the Greek economy had fared well.
The Greek contagion is not going to be contained even by the trillion dollar emergency fund announced recently. In the mad rush for growth, mounting government debts are no more sovereign. Not so long ago, Greece had A+ sovereign rating from S&P. There is too much borrowings in the developed world to funds welfare measures. Greece will access the costly bail out loans (with stringent conditions attached) to meet its immediate obligations in the fond hope that it will be able to extricate itself from the quicksand of this crisis . Bonuses to civil servants have been shaved, social security payments have been trimmed, state pensions have been frozen, taxes have been increased. These austerity measures announced by the government have angered the population who are taking to the street and burning banks. Trade unions are strong in Greece. A workforce that is used to a leisurely life will now have to swallow the bitter pill of austerity to avert another crisis.
If Greece is unable to get out of this crisis, then its ripple effect will traumatise Europe and the Euro. Many banks around the world will be affected once more what with their exposures through an intricate web of syndications. With countries in the Euro zone tightening their belt and Britain trying to rein its mounting debts, India’s exports to these countries will suffer. Japan too has an emerging sovereign debt crisis. Britain is heading for a debt crisis but its central bank is independent and therefore do not suffer from the rigidity of the Euro zone. The developed world is beset with a series of serious problems.
All this is not really good news for India in the long run. The impact is unpredictable although some vested interests may glibly brush aside the problem. The sad aspect of a sudden impact is that the average man on the street will not get any hurricane warnings. It will hit him hard and erode all his savings. The human tragedies of these manmade disasters are enormous.
The good news is that
- India’s foreign reserves are much more than its foreign debt.
- The government debt is 82 percent of GDP (compared to 125 percent for Greece or 115 percent for Italy)
- The economy is growing at least at 7 percent.
- India’s capital inflows are much more than its current account deficit.
- We have an intelligent and strong media.
The not so good news is that
- The fiscal deficit including the Centre and the States is likely to be alarmingly huge at about 10 percent of the GDP.
- There is all round increase in expenditure by way of higher wages, loan write offs, unemployment benefits, interest burdens and inefficient and loss making public sector units.
- If the Greek problem persists and the European economy tightens its belts, then the Indian economy may suffer.
- Unable to grow at 6 to 7 percent, government’s tax collections will be down and the fiscal deficit could balloon.
- With the fall of gloom over Europe, oil prices can come down (although Mr. Mukesh Ambani has predicted a three digit price for crude oil) and help offset the impact of slow growth on the fiscal deficit . If oil prices rise to three digit numbers, then it will be a double whammy.
- India may see a surge in capital inflows from the west like the migrating Siberian birds. We have seen and experienced as to how this hot money can damage the economy when they fly away. They come here to heat the system, boil the milk and take away the cream.
And some of the bad news is that
- Our national debt as a ratio of GDP is perhaps the worst in all of Asia.
- Our system is not delivering on many basic necessities of life – water, education, healthcare to mention a few.
- Corruption is rampant and its size is mindboggling. Just imagine if the 2G spectrum licences were auctioned transparently, the colossal proceeds would have gone to the coffers of the government and not to some private pockets. As Member of Parliament Mr. Rajeev Chadrasekar wrote “ The 2G Cellular licensing scam must be investigated as a serious white collar crime” (Hindustan Times – 18 May 2010)
- The political parties in their quest for power will foster unsustainable welfare commitments to their vote banks and burden the public exchequer.
- Inflation, especially food inflation, is very high. If not reined in, this could trigger riots.
- India’s unemployment rate is estimated to be about 10.7%. With weak economic growth prospects following the European crisis, this could go up, triggering widespread discontentment and unrest.
- There is disturbing news that industry is not able to find skilled workers/employees. The so called “power of a young India” could be a pipe dream ( and a real threat too) if skill development is not done on a war footing. A law as powerful as conscription should obligate all youths to acquire appropriate skills.
- If the government responds to another threatening global crisis by large scale public spending and sops, then the fiscal deficit could zoom to unmanageable levels.
- Our book keeping is not the best in the world. So why blame the Greeks. And our numbers are also suspect. Read – What is our real fiscal deficit? http://vvranganathan.com/?p=8 & Accounting Fib – The Naked Truth.
- The internal insurgency is a serious matter. 25 percent of our population are below the poverty line. If no real relief in the form of jobs and a livelihood is provided to the disgruntled and misguided youth, they can be easily radicalised by the extremists. This is a real threat. Imagine an LTTE style rebellion. This threat is worse than international terrorism.
- Our political leaders are always reactive, barring a very few. And some do not even react.
Ruling a country like India and running its intricate economy is like flying a modern aircraft. Take a look at the cockpit of the Airbus – A380. Do you think a chopper pilot dare command it? Will you board this flight? Will the airline have the nerve to put a puny pilot to do the job? Take a look at the people who are running our governments. Barring a few capable leaders (you can easily count them on your fingers), do the rest of the flock inspire any confidence? By a conspiracy of happy accidents we have (and had) a few smart team of people who have so far steered this country out of trouble. We may not be so lucky for ever. The writing is already on the walls. Many of our senior and performing bureaucrats are getting older and I am disturbed to hear what is being whispered into my ears about the quality of many waiting to be pushed up. If Greece can get into this mess, we too can by our sheer complacency and lack of anxiety and alacrity. Of course God can help us again and again and again. Ignorance may be bliss and you can quote Socrates “I am the wisest man alive, for I know one thing, and that is that I know nothing”. God bless India.