European debt crisis

By Lim Sue Goan, MySinChew

How serious is the European debt crisis? Let’s see how experts view it.

Influential investor Jim Rogers noted that the world is certainly going to face another financial crisis which will be much worse than the one in 2008.

New York University Professor Nouriel Roubini said that the world economy is likely to undergo a double-dip recession in the short term, and some countries might suddenly leave the eurozone. It could determine whether or not the world enters a worse recession than the one in 2008.

The 2008 global financial crisis was bad enough but the possible upcoming crisis is expected to be worse than the one three years ago. How could it happen? What should Malaysia do?

In fact, the overconsumption crisis has been brewing for long. Portugal, Italy, Greece, Spain and Ireland have been labelled as the “PIGS” because of their stagnant economies, as well as high unemployment rates and fiscal deficits. Greece started to encounter a debt crisis since 2008. Later, Greece, Ireland and Portugal received assistance from the International Monetary Fund (IMF). Italy was the straw that broke the camel’s back.

Italy’s government debt is massive, at around €1.9 trillion, or 120% of its gross domestic product (GDP). It is even huger than the total debts of Spain, Portugal and Ireland. When its sovereign bond yields rose above 7%, market players described it as a “terrible crisis”.

Although Greece and Italy have successively elected technocrat prime ministers to take the heavy responsibilities of leading the country out of the debt crisis, it will definitely be full of twists and turns.

Technocrats could ignore votes and implement painful austerity programmes but politicians would not miss the opportunity to stir up troubles. Public demonstrations and strikes would further worsen the situation.

Greece, Italy and France will hold their general elections next year. The rise of economic nationalism and the far-Right groups who do not like foreign immigrants and the European governments could lead to the withdrawal of Greece and Italy from the eurozoe.

Once the European Union (EU) collapses, there could be a run on a bank causing banks to go bankrupt and setting off a financial crisis.

It must not be ignored that European countries might face problems one by one. France, with its €1.7 trillion debt, could be next sufferer and it might followed by Spain, Hungary and the United Kingdom.

Unfortunately, Malaysians are not told how would the European debt crisis affect the national economy. Government leaders still optimistically believe that the impact would be small since the country relies on petroleum, palm oil and domestic demand.

Let’s see how others respond to the European debt crisis. Hong Kong Financial Secretary John Tsang Chun-wah said that Hong Kong must maintain a healthy financial status and get prepared for the possible crisis triggered by the global economic downturn.

Meanwhile, the South Korean government plans to cut its budget deficit next year as a preparation for the growth slowdown.

Government and household debts are the risk of Malaysia in the face of the possible crisis. If no preparation is made while money is spent uncontrollably, we can never avoid the crisis without getting hurt. The problem is, where is our contingency plan?