When a country overspends, meaning it spends more than it gets from taxes year after year, it has to borrow either locally from its citizens or from local and foreign banks to balance its budget. This is what happened to Greece, the cause of Europe’s greatest debt problem.

In 2009, after years of denial, Greece finally admitted that it overspent for many years and that its added debts were the highest in the country’s modern history.  This is about 340 billion euros or $478 billion. In simple math, this represents approximately 10 times our country’s annual budget of approximately P1.8 trillion.  

What make Greece’s debt seriously problematic is because it borrowed most of it from European banks, unlike Italy which owed its mounting debts locally from its citizens. This gives Italy some breathing room and flexibility to sort  its IOU problem over time.

Because Greece is a member of the European Union and part of the Eurozone, its accumulated debts that were borrowed in the past years came mainly from French and German banks — the Eurozone’s biggest major lenders.  If Athens fails to pay any of its maturing loans, French and German banks would suffer mounting losses, weakening their banks’ capital base and consequently their ability to operate efficiently as Europe’s financial lenders. 

Without adequate operating capital, these major European banks would drag France and Germany to intervene by providing fresh liquidity or recapitalization funds to their ailing major banks may be able to carry on their role as Europe’s economic movers and shakers.

To do so in an acceptable manner, France and Germany have to get the consensus of all the European countries that belong to the EU.  These include the United Kingdom which is not part of the European Union but part of the Eurozone. These countries need to get the consensus on how to recapitalize their banks and solve Greece’s maturing loans. 

This is the origin of the European crisis, which now requires not only the EU member-states but all of the Eurozone countries to solve.

Negotiations on how Athens would pay down its maturing debts are in full swing. The European banks agreed to exchange Greece’s 100-billion-euro debt for bonds at a yearly rate of four percent while the International Monetary Fund, representing Greece, wants a lower yearly rate of 3.5  percent, rising later as Greece recovers. This is the estimated maximum burden that Greece can bear as its economy limps along toward recovery.

The deadline for Greece’s debt-for-bond swap is on March 20, 2012. This will give all concerned parties time to reconcile their differences. By that date, Greece is obligated to shell out initial payment or face default, an event which may force Athens to leave the EU.  

Euro crisis to hit China

The problems of Europe could end up dragging growth in China, the EU’s single biggest trading partner.  Any slowdown in Europe would affect China’s economic growth.  China is also a major holder of Euro sovereign bonds and would lose considerably if the EU debt problem festers.

It is now unavoidable that China’s gross national product would continue to suffer as long as the euro crisis continues. The decline in China’s GNP already started last year. This slowdown will now directly affect commodity markets, both in terms of volume and prices.


Effect on PH economy

The major European banks involved in saving Greece from financial ruin may need immediate cash liquidity from foreign borrowers like the Philippines. Therefore, to shore up their cash position, there is a possibility that they will pull out their money lent to local borrowers as soon as they mature. 

According to recent statistics, European banks have lent the country approximately $15 billion, the withdrawal of which can affect our economic growth.

Moreover, these European banks, through their local securities companies, are big traders of Philippine securities in our stock exchange.  Thus, the  liquidity problems of their parent banks may affect the trading volume in the  local stock market. 

Asia’s biggest trading partner is Europe.  Any slowdown in Europe will also considerably affect our exports to China and the European countries.

In conclusion, the Eurozone economic crisis is now becoming a global economic crisis that will eventually affect the Philippine economy.

If you have any questions about my column in particular or the stock market in general, please feel free to contact me by email: This e-mail address is being protected from spambots. You need JavaScript enabled to view it. or to my website:  www.philippinegolddiggers.com.

Till next week. 

In the meantime, keep your mind on the money and keep your eyes on the market.