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Greece and China woes: Should we worry?

TWO EXTERNAL financial upheavals in recent weeks are causing jitters well beyond the shores of where the events are transpiring.

Greece, owing to long-standing issues with its government finances, is teetering on the brink of a possible exit from the European currency union and from the economic union itself, a prospect now commonly termed as “Grexit.” Banks have been closed to prevent their collapse from panic withdrawals, and worries about possible repercussions on global financial markets raise the specter of another global financial crisis similar to the 2008-2009 episode induced by financial weaknesses in the United States.

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Closer to home, China’s stock market has come crashing down in what a blogger described as “a loss of 15 Greeces in market capitalization in a span of three weeks.” The Chinese stock market has indeed lost one-third of its value—equivalent to about 15 times the annual gross domestic product of Greece—within less than a month, in an unprecedented drop that has analysts scratching their heads. One theory even attributes the crash to the “ominous names” of the last three chairmen of the China Securities Regulatory Commission (CSRC), China’s stock market regulator. Writes Bo Zhiyue in The Diplomat: “The man who was CSRC chairman for almost a decade, from December 2002 to October 2011, is named Shang Fulin, meaning the probability of China’s stock markets going up is zero. Shang’s successor is named Guo Shuqing, meaning losing all you have, and Guo’s successor is named Xiao Gang, meaning cutting it all.” What’s clear is that China stocks had become so overvalued that a correction was inevitable. But no one seemed to have foreseen the market to fall so steeply and so quickly as it did over the past month.

To be sure, there is much pain and suffering associated with these developments in the two widely disparate economies—in one, induced largely by seeming government misdeeds; in the other, in spite of determined preventive government moves. In both cases, the problems were not at all unanticipated, but the respective governments were seemingly incapable to stop the inevitable.

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Greece’s woes are nothing new. The prospect of a “Grexit” has been around for several years, since the massive misrepresentation of the Greek government’s finances came to light in 2010. The problem sums up as follows: For a unified currency to work, the countries involved must synchronize their economic policies, especially management of government revenues and expenditures—and Greece did not quite conform. Adopting the euro required certain disciplines (the so-called “Maastricht criteria” agreed to by the European governments in the Dutch city of that name)—on the size of public deficits and maximum debt the countries could incur, among them. Based on these criteria, it is argued, Greece ought to have never been admitted into the Eurozone in the first place. Its government bureaucracy was seen to be bloated and prone to overregulation, corruption and political patronage.

But in its determination to be part of the union, it concealed the true state of its government finances, and continued doing so as its deficits grew beyond control. Things had to blow up at some point, and Greece has now become the first developed country to default on a loan from the International Monetary Fund, losing all credibility with creditors in the process. With banks on a forced holiday, citizens, especially pensioners, cannot access their hard-earned savings, while panic-buying and hoarding threaten to send the economy into a tailspin.

As for China’s stock market crash, the losses involved are of far greater magnitude relative to the Greek crisis, and opinions are divided regarding the seriousness of its longer-term implications. For some, it’s the beginning of the end of the China economic juggernaut, or what analysts have constantly predicted to be its inevitable hard landing, even doom. For others, it’s just another bump on the road as China seeks new directions for its economy, as slowing demand from faltering Western economies has taken the steam from its export-driven growth engine.

It’s important to note that the steep fall in the China stock market simply took it back to levels that prevailed only four months ago, and that it’s still 80 percent higher than where it was a year ago. It was the Chinese government itself that induced the recent extraordinary market surge, by easing restrictions on stock market investments using borrowed money. As a result, an unusually high proportion of stock market trades in China is financed by debt. Also unique is the preponderance of small investors in the stock market, much of whom reportedly don’t even have a high school education—an estimated 90 million people accounting for 85 percent of trades. Elsewhere, it is large institutional investors who take the lion’s share. China’s stock market crash is thus hurting large numbers of Chinese, and analysts believe that the Communist Party is most worried about the possible political backlash of all this, and not so much the financial and economic implications.

Will ordinary Filipinos be hurt by the Greek and Chinese crises? The 2008-2009 global financial crises hardly affected us; there’s little reason why things should be much different this time around. Our economy’s strength has lately been homegrown and internally driven (which the Chinese, incidentally, have also been aiming to achieve). If anything, I’d say it’s the potential political consequences of these events, rather than direct financial effects, that would ultimately be our greater worry.

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E-mail: [email protected]

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