ce are now in danger of sovereign default. A sequential run on the credit default swaps of European governments seems to have begun. Market rates suggest a 10-15% chance of Greek default. Greece’s national debt is a high 90% of its GDP, of which 20% has to be refinanced in a few months. It’s unclear how Greece can be rescued if it defaults. If Greece goes under, Italy, a G-7 country, will be next in line — its public finances are almost as bad. Britain can devalue to survive a financial crisis, but this option is not available to troubled Eurozone members tied to the euro, including Ireland, Portugal and Spain. Ailing banks in Eastern Europe are mostly owned by West Europe, so a banking collapse in the former could lead to massive contagion in the latter.
Indeed, the very conceptual foundation of the Eurozone, as one where a common currency ensured credit to all on good terms, is now in doubt. Wages and pensions are too high in some countries relative to others. The problem was masked in good times. Now that the tide is going out, it’s becoming clear who was swimming naked.
Another top economist said at Neemrana that three aspects of the global crisis had been underestimated. One was the vicious downward spiral where financial distress caused production distress, which caused yet more financial distress. Second, the vulnerability of banks had been grossly underestimated. Third, nobody anticipated the speed with which galloping commodity prices in the first half of 20008 would be followed by collapsing prices in the second half.
As a result, he said, the world faces a shock of unprecedented proportions. Growth in advanced economies will fall in 2009, for the first time since World War II. Asia may seem in better shape than others , but this is largely because of the lag in transmission of the crisis from the West. Soon, Asia will be hit badly too. And India will suffer along with the rest of Asia.
Another top global economist declared that the crisis was structural, reflecting a serious global misallocation of money in recent years, which had created many bubbles that had now burst. Pumping in more money could not resolve the problem, since it amounted to an attempt to reflate the old bubbles. Instead painful structural change was needed, he said, and this could take years.
The mood of these top global economists at Neemrana was far gloomier than i had expected. While hoping they are wrong, we must be prepared for their being right.
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