The sheer irony of the current economic outlook is simply breathtaking. In 2008, the mighty Lehman brothers, leveraged to the hilt, were knocked out of businesses by a small spike in oil prices that contributed to the bursting the hose price inflation bubble. You might not be surprised to learn that banks such as Lehman helped arrange complicated balance transactions designed to conceal the level of Greece's debt.
When you think about it, the correlation between the high point of this oil price cycle and Greece's current troubles makes perfect sense. As the cost of running public services is driven up slightly by the price of oil, the budget (arranged when the price per barrell was substantially lower) just won't make ends meet. As you may have noticed, the oil price bubble seems to have stagnated, falling from $125 p/b to $115 p/b over the last month. Those investors who were riding the gravy train upwards now need a new source of income to compensate for the declining value of their oil asset. What better than to pick on the weakest kid and sell greek debt to drive up yields (and then arrange to re purchase them at higher interest with convenient conditions attatched)...
The country is now on the brink of bankruptcy- with yields (effectively interst rates) on 2 year debt up to 28% p/a. There is simply no way the Greek government can afford to borrow any more money. The ponzi scheme is over. Greece is now living off pay day loans, and the loan shark is bringing out the baseball bat. On a back of the paper calculation, Greece would have to start growing 15% a year to possibly sustain its current debt burden without immediate assistance. They're currently in a 6% a year recession.
In the UK, figures just released show retail sales slumped 1.4% in May. Did I predict that one of the symptoms of the coming crash would be a decline in retail sale volumes? Essentially yes; I argued that one of the factors in the 2008 crash was a decline in retail shares- obviously linked to sales- in turn linked to the "credit crunch"- and most importantly, oil. None of these signs bode well for anyone. The market is more vulnerable now than it was in 2008, like a rabbit in a tiger cage, all it can hope for is that the tiger start fighting each other over it, and it can escape in the meantime. The analogy here is that the different economic jitters we face right now could to some extent offset each other. If growth stumbles, inflation will too, and so might interstest rates on European debt. However, it's almost inconveicably unlikely that the right "balance" between the different crisis will come about by chance. Investors are acting with a predator mentality with no regard for sustainability in their decision making. "Every man for himself" pretty much sums up the current situation.
A greek default could be significant enough to wipe out enough of bank balance sheets to close the gap between assets and liabilities that allow them to keep lending. That's why the debt crisis has potentially major ramifications for the entire European economy. We should be worrried; very worried.
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