Friday, 12 February 2010

Global

The past week has been dominated by Greece’s debt crisis and attempts by the EU to help them out of it. Greece switched its currency, the drachma, to the Euro in 2001 and gained a seat at at the big boys table in the financial markets. Overnight investors saw stability (Euro, Germany, France) where yesterday they saw risk (Greece, drachma). Greece found it easy to borrow money at low interest compared to rates they were afforded as a standalone country with a weak currency. After all they are now backed by some of the world’s strongest economies in the Euro.

As it was with individuals finding it hard to resist mounting piles of cheap debt before the 2008 financial crisis, so it was with Greece. Cheap debt and willing investors fuelled a spending spree in government: salaries in the public sector doubled between 2001 and 2009. Together with wide spread tax evasion (it is estimated that half of Greece’s economy operates out of the taxman’s reach), this steadily meant an increasing budget deficit which has peaked 12.1% of their GDP at February 2010 and has triggered crisis talks in the European Parliament. Most alarming is that the European Union has only come to know of the extend of Greece’s debt burden in recent months, it seems that transparency isn’t just an issue among the Greek population – the government has been cooking its books to hide from trouble.

Exposed and in trouble, Greece’s finance minister George Papaconstantinou has to slash spending and stabilise his budgets before convincing investors to refinance $25 Billion in debt in the next few months or face defaulting on debt payments. The European Union standard for budget deficit is no more than 3%, Greece has a long and painful road ahead to get there.

South Africa

President Jacob Zuma’s State of the Nation speech was the focus of economic news in SA this week. The key notes of the speech were:

• The economic recession seems to have ended, although it is too soon to tell how fast the economy will grow in the immediate future
• Therefore the government will continue its support measures, such has loans to small businesses in distress and retraining programmes for retrenched workers
• New plans to increase literacy in schools, access to housing and foster independent electricity suppliers to the national grid
• Plans to spend R846 Billion on infrastructure in the next three years