The contagion thingy

Andrew Pegler – 18 June 2010

Europe going belly up affects us in many ways, some obvious, some not, but all form part of what’s called contagion.

Europe is copping a belting at the moment as the clutch of nations known as P.I.G.S. (Portugal, Ireland, Greece and Spain) struggle to pay their debts. Ratings agency Moody’s just cut Greece’s credit standing by four notches to junk status from A3 to Ba1 – that’s 11 notches down from AAA, which is its highest (Australia is AAA). That means Moody’s reckons Greece is a good chance of default. Interestingly, because of Europe dramas Moody’s now divides its AAA governments into the resistant, the resilient and the vulnerable, which sounds like a Clint Eastwood film to me.

Then there’s the Spaniard that’s just been thrown into the works or as I also like to put it – the strain in Spain is falling mainly on the brain. Yep, Spain is Europe’s new credit crisis. Unemployment there is about four times ours and two other ratings agencies, Fitch and Standard & Poor’s, just cut it from AAA to AA. And with European banks now refusing to lend it money, Spain is looking shakier than a matador with broken sword and nothing between him and a raging, bloodied bull but dust and moments.

So is there any reason for us to be shaking in our RM Williams? Yes and it’s called contagion – the rapid, hard-to-predict, panic-driven spread of a financial crisis. It usually rises out of a series of vicious cycles that form when confidence in a country’s ability to repay its debts goes south. Right now P.I.G.S., Germany, Britain and Hungary are enacting mind-boggling, multibillion Euro dollar austerity measures to reign in budgets and address debt. These huge cuts to government expenditure will severely erode Europe’s growth and thus constrict growth here. Why? Well it’s part of the interconnectedness of the global economy. First hit will be exports as European demand contracts. But with the rise of Asia that’s not as bad as it once was, for example, according to an article in the Fairfax Press, we export more to Thailand these days than to Germany and France combined.

The real problem is the indirect one and that’s the impact on China, which sells over 20% of its exports to Europe. That’s a big chunk of change China is set to lose and means a stall in their need for our dirt. A weaker Euro also makes our exports more expensive and thus we sell less of them. And poor ole tourism will get another belting on two fronts – firstly a declining Euro against AUD and secondly there being less Europeans travelling.

For now, only time will tell but as wrote the other day “time is a bandit. We always thought it was a traveller – Tenterfield Saddler and all that”.