As an isolated incident the unfolding Greek and European debt crisis may have had a negligible impact on the Australian economy but there are more forces at work, writes Bina Brown.
Years of lavish spending might have come to an abrupt end for the citizens of Greece but that is not enough of a reason for global investors to start panicking.
Indeed if Greece defaulting on its debts was an isolated incident it is questionable whether there would have been the same level of panic as seen across financial markets in recent weeks.
One theory is the Greek debt crisis coinciding with a raft of other negative events including the volcanic ash cloud across Europe, a major oil spill in the Gulf of Mexico, criminal proceedings against Goldman Sachs, potential (and subsequent realisation) of a hung Parliament in the United Kingdom, the threat of more countries defaulting and a resource super profits tax in Australia, is too much for global financial markets to bear.
In subsequent weeks there have been some equally positive influences on financial markets such as the successful bailout deal for Greece, a substantial upgrade of IMF economic forecasts, a strong growth story from China, solid US economic data and positive US earnings. But financial markets are ignoring the fact that the positives are more fundamental and long lasting in nature than the more speculative, fear-driven and temporary negative events. The issue of Greece was and is one of contagion, despite the strong efforts of the European Union and the International Monetary Fund in coming up with a bail-out package for that country.
Almost immediate speculation that the bail-out funds would be insufficient saw Greek protestors take to the streets and all of a sudden contagion fears took hold. But even if Portugal, Spain and Ireland go the same way as Greece, as it is feared, and default on their debts, the impact on Australia should still be negligible. This is mostly due to Australia's geographic proximity to Asia rather than Europe and a relatively stable outlook for economic growth.
That doesn't mean it won't feel some of the repercussions, which has been the case in recent weeks with the dollar and equity market being heavily sold.
One reason Australia has been caught up in the recent global financial market sell off is that 40 per cent of the equity market is held by offshore investors who, in repricing sovereign and economic risk, are focusing on the US economy and the US currency as a safer haven in the current uncertain environment.
Some market observers have likened the recent panicked trading on financial markets to the post-Lehman chaos of September 2008 when equity markets took a dive, debt markets froze and inter-bank lending rates soared.
The threat of contagion throughout Europe means banks could well stop lending to each other, and ultimately customers.
As much of the world discovered in 2008-9, tight credit is not good for an economy. Fortunately the banking system is better capitalised than it was and several listed companies have raised large amounts of capital and bolstered their balance sheets, thus reducing their dependence on the banks for capital.
That is not to say the Reserve bank won't be paying close attention to global equity and debt markets in coming months as it ponders its next interest rate move.
Blowouts in budget deficits around the world are nothing new – and indeed are to be expected - following the global financial crisis. What sets Greece apart was that it had been submitting false budget figures for years.
Having false statistics as well as deficit spending made the Greek deficit somewhat unique but Greece is not the first and it won't be the last country to tap into IMF funds when they run into difficulties.
Romania, Latvia and Hungary received IMF aid over 2008 and 2009.
In 1976 the UK was forced to seek a US$3.9 billion loan from the IMF and slash its deficit by 20 per cent.
As embarrassing for the UK as it was it was also successful, leading to a sharp improvement in the economy in the following year.
It may take a couple of weeks or even months for investors to work through the short term uncertainties versus the long term fundamentals and until they do, the old adage "you have nothing to fear but fear itself" remains particularly relevant.
