The Greek tragedy is coming, Malaysia will not escape

The European Union’s failure to solve the Greek debt crisis is sending shockwaves through the financial, currencies, equities and derivatives markets. This will have a huge rolling impact, fanning out from the markets to the private sectors and to the governments around the world. Malaysia will not be spared.

At this moment in time, Greek bonds are pretty irrelevant with 3 year bond yields going at 2860 basis points and the 30 year bond is price at 40 cents to the dollar. Greek CDs are trading at 1900 basis points and that basically seals the fate of Greece as good as being a default nation.

There are two developing events that have totally shocked the markets.

The omens

Firstly, Germany wants the dateline of the second Greek rescue package to be pushed back to September, reflecting the problems in drafting a solution to the Greek crisis. This will create an interim shortage of funds for the Greek government to repay some of its debts which is due sometime next month.

Secondly, the rate of exodus of MPs from the ruling party Pasok is gaining momentum. With Pasok’s slim majority in Parliament, the ongoing defection of MPs means that the proposed fiscal measures will likely fail in Parliament, and Greece will have to leave the Eurozone. This will threaten the breakup of the entire Eurozone with Ireland, Portugal, Italy and Spain to follow.

Moody’s had placed BNP Paribas, which is France's biggest bank, Societe Generale SA and Credit Agricole SA under negative review due to their debt exposure in Greece. German banks were the biggest foreign owners of Greek government paper with US$22.7 billion, followed by their French counterpart with some US$15 billion out of a total of US$54 billion held by foreign banks, according to the BIS (Bank of International Settlement or the Central Bank of the worlds Central Banks).

Standard & Poor is also downgrading four Greek banks namely, National Bank of Greece, EFG Eurobank , Alpha Bank A.E and Piraeus Bank S.A due to “outflow of domestic deposits could intensify because of Greece’s deteriorating creditworthiness in its banking system”. In short it is just a nicer way to say that there is a 'run on the banks' going on.

Parliamentary disaster

Meanwhile, Greece has erupted into a full scale disaster with violent protests and riots daily and this could lead to a total shutdown of its government. The only thing that has maintained investors' confidence is that there are always the Central Banks to bailout and intervene in the financial system.

However due to the past bailouts by these Central Banks, the actual problem of the debt crisis is never solved. They have just been kicking the can down the road since 2008 and never took the hit that was needed in 2008 to fully shake out the rot from the system.

Total bets on global derivatives of more than US$600 trillion are still open in the financial markets. What the central banks did was print more money and lend it to the insolvent big banks. In other words the Central Banks assumed all the risk of the private sector and transferred it to the public sector. No wonder the UE Federal Reserve's balance sheet is over US$2 trillion.

So what does this tells us? It tells us that when the next crisis strikes, this time not only banks and the private sectors are going down but entire countries as well. And we are already seeing this in Greece and Iceland.

Once the bailout bandwagon stops in Greece, the collapse will spread like wildfire because Greece is the Bear Stearns of the Sovereign Debt Default. Given the leverage and interconnectivity of the global financial system, it won’t be long before this 'little European' crisis reaches our shores. And the latest should be by early next year.

Social implications

So what are the social implications of the collapse?

- Rising crime, when people devoid of jobs and are unable to support their families, they will turn to crime out of desperation

- Corruption, high and low level government officials will look to supplement their income from kickbacks and bribery.

- Police state conditions, government will send police out to show the people who’s really in charge and they will use unnecessary force to disperse crowds.

- Censorship, government media will be censored and the government of the day will create events to distract the people from the real problems of the economy.

- Lower standards of living due to the effects of inflation. People will be more hard squeezed and desperate.

- There will be more protest and riots due to the dissatisfaction of the population with the ruling government. Expect more bloody street protests.

- Global financial markets' meltdown. There will be blood on the financial streets as well.

- Massive unemployment in the economy will force countries to use ‘beggar thy neighbor’ policies, which is already happening now, through devaluation of their currencies. Every country will try to outsell each other in order to sustain their employment level.

Pretty ugly

So while we shall prepare ourselves for the bad times ahead, the unavoidable question is how bad can it be? To what extent can Malaysia cushion itself from economic collapse?

Is there anything that Bank Negara governor Zeti Aziz or Finance Minister Najib Razak can do? Or should the things they needed to do, been done long ago?

As a rule of thumb, the larger the economic distortion the harder the fall. Massive distortion in economies around the world are happening because governments are printing massive amounts of money in order to prop up their economies. It will be pretty ugly here as well.

- Malaysia Chronicle