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querying the hive mind
Greek economic problems affect interest rates?
June 2, 2012
How will the Greek economic problems and related Euro currency issues affect interest rates and the property market in other continents, especially Australia?
Work & Money
(2 answers total)
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by Ric Battellino, Deputy Governor of the Reserve Bank of Australia, could provide a good starting point for answering your question. The section towards the end, titled Australia's Exposure to European Developments, outlines three ways the issues in the Euro-zone could affect Australia: increased costs of funds for banks, indirect trade exposure (that is, although Australia doesn't trade much with Europe, some of our major trading partners such as China and India do trade a lot with Europe), and unpredictable confidence effects.
on June 3, 2012 [
The worst-case scenario for Australia is probably something like this:
Greece either repudiates its debt or says it will only pay it off in a nearly-worthless national currency (perhaps called a drachma, for historical reasons). It is forced to leave the Euro.
Lenders stop being willing to lend money to Spain and other countries, because they think they may follow Greece out of the Euro. The European Central Bank is unable or unwilling to guarantee Spanish debt. Spain repudiates its debt, leaves the Euro.
Nobody is willing to sell things to Europe because they don't know whether the purchaser will pay in Euros or some new national currency. China's exports fall dramatically.
A fall in Chinese demand causes a recession there. Imports from Australia crash.
Australia now has a large balance of payments deficit and higher unemployment due to the semi-collapse of the resources sector. Falling domestic demand creates more unemployment which reduces demand, etc. Property prices fall because of a lack of consumer confidence.
People demand that the government Do Something. It pushes interest rates down to the floor, perhaps below the inflation rate - so they're effectively negative. This helps with demand, and with property prices. It also lowers the value of the Australian dollar, which is good - an influx of foreign currency was making it more expensive.
Higher unemployment means the government needs to spend more money on welfare. It starts using novel techniques to raise money. The Australian dollar falls still further and inflation rises.
Personal bankruptcies and mortgage foreclosures increase. Commercial property vacancies increase because nobody is starting new businesses.
It would now be a great time to borrow money and invest in property - but nobody is lending. Unemployment is very high and so is inflation. Investors are desperate for safe investments but businesses are going bankrupt at an alarming rate.
We are all so screwed.
Ultimately Europe starts buying again, China starts importing Australian resources again, and we're all fine. I hope. Takeaway lesson: be cashed up, get out of resources and allied industries, and hope things get better soon.
Joe in Australia
on June 5, 2012
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