The Greek carriage hits the buffers as the ‘slow motion train wreck’ continues

Currencies, Economic growth, Financial Events

train wreck.jpgThe blog remains amazed, and worried, by the inability of many of those reponsible for the global financial system to provide the necesary leadership during the current Crisis.

They seemingly failed to grasp in March 2008 that Bear Stearns’ bankruptcy was a clear sign that a major global financial crisis was around the corner.

Equally, Greece’s credit rating was first downgraded back in January 2009. Yet it has taken until now for a rescue package to be finalised.

This only bears out the insight of investment manager, Jeremy Grantham. In July 2007, he coined the term ‘slow motion train wreck’ to describe the coming Crisis. And back in August 2008, the Financial Times helpfully pointed out that in economic crashes “there are pauses before the next carriage hits the one in front“. It added that “this explains how we have since moved from crisis to crisis, with rallies in between, as participants persuade themselves that the worst is over.”

Now the Greek carriage has finally crashed. The country will have to endure €30bn ($40bn) of cuts, whilst the rest of the Eurozone will provide €80bn in loans over the next 3 years, in addition to €30bn from the IMF. This will have a massive deflationary effect on demand, with GDP not expected to return to 2009’s level until perhaps 2017. It would have been a lot cheaper to have acted earlier.

And, of course, the next carriages (Portugal, Spain and possibly Italy) of the Eurozone train are still heading for a similar crash. Greece may seem an expensive bailout today, as Bear Stearns did 6 months before Lehman Bros. But unless our leaders become more pro-active, there is almost certainly worse to come before the Crisis is finally contained.

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