Sovereign debt burdens in the West still threaten to torpedo
the global economic recovery, despite Greeces historic
bailout yesterday from the European Union and the IMF
yesterday, experts have warned.
No-one should underestimate the risk of an economic
downturn in the eurozone due to large government debt
burdens, said Gerard Lyons, chief economist at Standard
Chartered in Tashkent yesterday.
As Emerging Markets went to press, Greece agreed to
budget cuts estimated at 13% of GDP, and structural reforms, in
return for a bailout package of more than 100 billion euros.
The deal was due to be approved by EU finance ministers late
The move would cover its financing needs for three years
after investors boycotted Greek government bonds amid fears the
country would default on its debt.
Greek prime minister George Papandreou said in a televised
address yesterday that while the deal will require big public
sacrifices, the nation must choose between a rescue and an
But leading officials including French foreign minister
Bernard Kouchner warned that Greeces financial lifeline
will not stem a fiscal crisis that could spread through the
euro region, in particular Portugal and Spain.
In the near-term, the bailout package will help to
stabilize markets, but at some point the EU will come to the
fork in the road and must agree to a political union else the
eurozone will be vulnerable to sovereign debt crises due
to a lack of fiscal co-ordination in the 16-member currency
zone, said Lyons.
Jean-Michel Six, chief Europe economist at Standards
& Poors (S&P) rating agency said: Greece
will still need to rely on international markets, since this is
only a three-year plan. They will need to implement big reforms
to bring down the deficit: only then will confidence
It was S&P whose downgrade of Greek and Portuguese
government debt last week triggered a surge in Greek borrowing
costs that left the government unable to finance its deficit in
Lyons at Standard Chartered said: the best way to
reduce government debt is through growth and the fact that
eurozone growth prospects are poor, suggests the debt problems
will loom large for the coming years.
The Spanish governments interest payments on its debt
were 4% of its revenues in 2006, and have risen to 7% today.
For Portugal and Greece, respectively, the proportions were
6.4% and 10.3% in 2006 and 7.1% and 15.1% in 2010.
ADB chief economist Jong-Wha Lee said the stability of the
eurozone rests on the credibility of the Greek
governments success in fulfilling the EU and IMF
But he downplayed down the risk of a negative growth shock
in Asia on the back of southern Europes government debt
burdens due to Asias strong economic
Instead, high eurozone debt is likely to drag down regional
growth, crowd out private sector borrowing and trigger the
European Central Banks to keep interest rates low for a
prolonged period, said Lyons. This will further
exacerbate the problem of large-scale inflow of capital into
Asia and increase the risk of asset bubbles.
Nevertheless, policymakers in Tashkent yesterday stuck an
upbeat tone on news of the Greek bailout. With the
support of the EU and of the international institutions, we are
confident that Greece will be able to tide over the
crisis, said Chinas finance minister Xie Xuren
Six of S&P said: The Greek debt crisis is
providing a political incentive and boosting domestic opinion
in favour of government deficit-cutting programmes in other
economies in the region.