A Greek tradegy

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Until recently I must confess my only interest in Greece was food and mythology, oh and a nod to Stelios for bringing us cheap flights.

But my mind has turned from moussaka to money more recently as it transpires that the Greek Government has a gaping hole in its finances and hasn’t been completely honest about just how big the hole is.

The problems facing Greece are not that different to here, just more extreme. The Greek Government ran a sloppy ship during the good times and hasn’t tightened its belt sufficiently during these bad times.

After spending around 50 billion more euros than it has, the Greek Government needs to borrow heavily to plug the gap, but markets are understandably reticent to lend the money through buying government bonds as they’re worried they won’t get their money back, i.e. the bonds are viewed as ‘junk’. This pushes up the interest rates Greece must offer to attract investors, which in turn increases its annual interest bill – a downward spiral - a bit like being trapped on a high interest credit card with too little income to pay it off.

You’d expect demand for Greece’s currency, the euro, to weaken given these difficulties. But it’s not that simple, as the other 15 eurozone countries that share the same currency won’t want to see the euro suffer as a result of events in Greece – especially those with more economic clout such as Germany.

Consensus is that they’ll put their hands in their pockets to offer Greece some sort of rescue package, probably demanding a say in how Greece runs its financial affairs in return.

Nevertheless, the euro will undoubtedly take a hit, especially shorter term. And eurozone woes could continue given Portugal, Spain and Ireland are also in financial dire straits.

Why should UK investors care? Well apart from global stockmarkets catching a cold from the initial bad news, the outlook for eurozone stockmarkets has further weakened – bad news if you own an investment fund in the area.

And although a weaker euro is good news if you’re taking your summer holiday in Europe, it reduces the value of euro based investments when converted back into pounds.

What this Greek tragedy highlights more than anything is that Western economies still have a long way to go before they emerge from the global downturn with their finances intact. The inevitable tax rises and spending cuts, necessary to start balancing the books, have yet to bite. And when they do, it will hurt...a lot.

When I was growing up I always assumed I’d probably live to see the balance of economic power start to shift firmly from West to East. I just didn’t think it would so visibly be happening by the time I hit 40.

I really hope both the eurozone and the UK can emerge from this storm sooner than later, but I’ve a feeling things will never quite be the same again.

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