At this time it is important to put the Greek situation in perspective. Will we be talking about Greece 12
months from now? Clearly, no one can predict how the stock and bond markets will react in the coming
weeks to developments in Europe. After all, as we all know, in this kind of situation the market is driven by
emotions (panic?), not fundamentals.
It is not enough to say that the impact of the crisis will be limited due to the fact that Greece is an insignificant
player in the global economic arena. After all, Thailand which originated the Asian debt crisis of 1997 is not
exactly an economic giant. The more important focus should be on the shape of the global economy at the eve
of the crisis. And in this context note that the crisis is occurring in an environment of a recovering global
economy while the EU’s bailout of Greece implicitly guaranteeing the debt of larger economies such as Spain
and Italy. The drivers of global growth now include China and India, which are less vulnerable to Europe’s
downturns. At the same time, Latin America and Southeast Asia enjoy much stronger government finances
and more moderate exchange rate. These factors reduce their sensitivity to economic shocks. Furthermore,
Greece, Portugal and Ireland don’t have the trade or capital market gravity of their larger European neighbors.
The Greek crisis will end up being an important event in the history of sovereign debt, but its impact on the
global economy will be minimal. More important focus should be on the fact that the crisis is an exaggerated
preview of what we should expect to see down the road from other countries. After all, Greece is not the only
country that is facing a mountain of debt. Yes, the magnitude is different but the direction is the same. In
Greece, they call it austerity measures, in North America it will be called reduced spending and higher taxes.
The point is that fiscal policy will work as a clear negative for overall economic growth. In Canada, for example,
a government that was responsible for no less than 40% of overall economic growth during the past decade
will start acting as a negative for economic growth in the second half of 2010 and beyond. The fiscal drag in
the US will be much more significant.
Accordingly, while the Bank of Canada will probably proceed with its plans to raise rates come June or July, the
upcoming fiscal challenge suggests a very gradual approach. As for the stock market, any significant sell-off in
the coming weeks should be seen as a buying opportunity.