Greek tragedy and its aftermath: Indonesia’s economy at risk

Eight months into the Greek sovereign debt crisis, it is clear that the situation being faced by the world economy is different to the crisis in 2008.

The differences are related to at least two things. First is political leadership and second, limited fiscal room, both in the US and in the euro zone.

The other difference that could be cited is the ability of Asian growth to act as cushion for a weaker economic recovery in the West.

In 2008, strong growth in Asia, especially in China, was able to prevent a further global economic slowdown. Now, growth in China is slowing as has been indicated by the contraction in its manufacturing output over the last three months.

The reason for this slowdown is because of China’s own efforts to cool its economy down to prevent it from overheating, but it is also because the sluggish economy in the West has started to affect Chinese exports.

During the crisis, policy makers in the eurozone have been indecisive; they seem unable to come up with a comprehensive solution. The excuse given by these political leaders has been the apparent difficulty in reaching agreements quickly 17 countries that make up eurozone.

However, economists and market analysts suspect that Europe’s political leaders do not have the political courage to make decisive and bold actions to deal with the debt crisis, for fear that these will require big sacrifices from their voters.

People in Northern Europe have been asking why they should pay for what they perceive as the profligacy of the Greek government and its people. Proposals that were agreed on were thus designed to only prevent further catastrophe temporarily, without addressing the underlying causes of the crisis.

Only after stock prices all over the world plunged into a free fall that wiped out nearly US$4 trillion from the global capital market within one week last month, did the eurozone political leaders begin to sound more brave in providing a commitment to boosting Europe’s bank capital that had been eroded by their holding of Greek government bonds.

The other factor that could see the debt crisis turn into a more prolonged crisis is that the US and the eurozone countries are being forced to consolidate their fiscal stance after their budgets were battered by huge deficits.

A combination of stagnating economies and reckless spending on social security and entitlements has caused havoc to the budgets in these countries.

In 2008, the US government budget still had some room to maneuver, allowing it to provide fiscal stimulus to counter the economic slowdown. Now, the ability of Western governments to provide fiscal stimulus has vanished.

In the US, the problems have been made worse by the political squabbling between the Republicans and the Democrats. The debates on deficit reduction and job creation in Washington have degraded into a political posturing, especially by the Republicans, ahead of the election next year.

That leaves monetary policy as the only hope for a solution to this crisis. But even in this area, central banks seem to have exhausted their policy instruments.

They have kept interest rates near zero for some time and some monetary quantitative easing has been tried by the US Federal Reserve, but with no concrete results so far.

Recent decisions by the European Central Bank and eurozone governments to assist banks to recapitalize after suffering losses from their holding of Greek government bonds will help at least in preventing a banking crisis. But the real solution to the debt crisis rests on the ability of the Greek economy to stand on its own feet and grow.

However, for the Greek economy to grow, the Greek government will have to initiate painful structural reforms that will break some taboos, including cutting its number of government workers, cutting wages and pensions, selling off inefficient public entities, and opening up more businesses to investors.

Many doubt that the Greek government has the strength to do these things. The acknowledgment by the Greek government recently that they would miss a deficit target agreed to earlier by the euro zone government and the IMF indicates how treacherous the road to stability is.

This is also a reflection of the pain threshold of the Greek people, beyond which further austerity measures can not be enforced without blood spilling in the streets of Athens.

Poor Greece! This is not Argentina. This country defaulted on its debt several years ago, pushing its economy into a severe crisis. But Argentina had guts and luck.

They devalued their peso, and before long came a commodity boom. For the Greeks, devaluation is out of the question. Being tied to the euro as their currency, Greece is denied a powerful economic instrument.

The eurodebt crisis will impact the Indonesian economy through two channels. First through trade, and second through the capital and financial market. The US and EU bought 20 percent of our non-oil-and-gas exports.

The weakening of our export to the EU has been evident for the last three months, and the slowing of our exports to the US and China in coming months can not be ruled out.

The first victim of economic slowdown in China will be our commodity exports on which our export economy is still heavily reliant.

Impacts through the capital and financial markets will take several forms. The weakening of banks in Europe and the US could limit the funding of investment projects in Indonesia.

Unfortunately, most of the offshore funding comes from European banks and European-based banks. A funding squeeze could delay the execution of many vital projects including those in the oil and gas sector and infrastructure. The same thing happened in the 2008 crisis, and there is no reason why it will not happen again.

The sell-off of equities in the Jakarta Stock Exchange not only wiped out trillions of rupiah of financial assets, but the market turmoil has prevented or delayed several IPOs.

This will delay or cancel several planned capital investments. Meanwhile, the sell-off of government bonds has pushed down bond prices, and increased their yields, making it more expensive for the government to issue bonds.

Efforts by Bank Indonesia to prevent the rupiah from depreciating too steeply have been costly; our exchange reserves have slid by $10 billion in one month, and could slide further if market confidence does not pick up.

The government needs to do more than just reactive, short-term measures.

It has to embark on a comprehensive review of its policies and regulations with the aim of making life for businesses easier in the face of coming difficulties.

The writer is an economist.