Just one week after Greek voters turned down Europe’s latest offer of a financial rescue, its leaders agreed to an even more painful deal. This came after Prime Minister Alexis Tsipras told voters that he would have more leverage over Europe if they turned down the previous deal.
A bailout package previously estimated to top €50 billion is now expected to cost roughly €86 billion. Some of the increase is to cover costs to re-capitalize Greek banks which have largely become insolvent as depositors sought to pull their savings while still denominated in euros in case Greece converted back to its pre-euro currency, the drachma.
Voters previously turned down a proposal that would have involved tax increases and cuts to pension benefits. The new tentative deal requires the Greek Parliament to very quickly approve these items. In addition, Greece will have to pledge €50 billion in state-owned assets that will be privatized in coming years, under the supervision of the European Union. Greeks are also required to make significant policy changes, including new laws making it easier to fire employees and to reduce state control of certain products such as pharmaceuticals and milk.
his will be the third financial rescue of Greece in recent years, on top of €73 billion in 2010 and €154 billion in 2013. To give some idea of the enormity of this bailout for such a small country, it would take $33 trillion to reach the same percentage of U.S. GDP.
We were not particularly concerned about the much-feared “Grexit” (a contraction of “Greek” and “exit”) from the euro. Greece represents just 1.8% of Eurozone GDP and much less of the global economy. Our only concern was that Europe might be too lenient on Greece, as it has been in the past, which would make it more difficult to demand austerity from other troubled nations. This latest agreement, should it be completed mostly as contemplated, would allay our concerns.
China’s stock market has been on a roller coaster over the past year. It approximately tripled in less than a year, then fell one-third before partially recovering. In an effort to boost softening economic growth, China motivated investors to buy shares. It appears to have worked unsustainably well. The amount of margin debt in China quintupled in just one year. However, very few Chinese actually own shares, and most companies raise money through debt issuance rather than in the equity markets.
China is far from a market economy and the government is overly intrusive into its markets and economy. After the stock market slipped, the government sought to prevent further weakness by banning large shareholders from selling. Trading in almost half of listed companies was suspended. Barring the doors is a sure-fire way to induce panic. Maybe it will work this time, but government interference slows the development of the private markets China says that it wants to create.
While U.S. investors panicked in recent weeks, they failed to take into account that Greece is irrelevant to the U.S. economy and China isn’t that important either. China accounts for just 7% of exports from the U.S. In comparison, Canada and Mexico buy 34% of U.S. exports, and Europe represents another 22%. However, a serious impairment to China’s growth would be significant as China has provided a high percentage of global economic growth since the 2008 economic crisis.