In the last few weeks, Greece has taken the center stage in the financial markets. Within the next two months, Greece has to pay back the maturing bonds [to investors across the world] and finance its budget deficit. The country needs to borrow around $ 40 billion from the international markets. With 10 year Greek Government bond interest rates of  around 7% [more than 3% to 4% higher than 10 year U.S. Treasury Bonds and German Government Bonds], this has led to fresh worries over a potential default by the Greek Government. What has added to the problem over the last two days is a rapid withdrawal of deposits from Greek banks by its citizens. Unless Greece agrees to the terms set forth in the rescue package put together by the European Union and IMF [ to reduce government spending and increase taxes], it is difficult to get the support of this consortium to raise the $ 40 billion to stave off the crisis. As you can see from the graph, Greece’s debt is over 111% of GDP. We believe the situation in Greece is getting grimmer day by day and could be a trigger for a crisis in other European nations – Portugal, Italy and Spain.

The China Bubble

The fiscal stimulus initiated by China last year through bank lending to the tune of $ 1.2 trillion has led to potentially unstable conditions in their economy. According to well known investor James Chanos – with 60% of the country’s GDP relying on construction, ‘China is on a treadmill to hell’. Marc Faber a long time optimist on China and well known economist Kenneth Rogoff have also spoken of a China Bubble recently. With the Chinese government trying to enable a slow down in real estate speculation via a recent tax on sale of homes owned less than 5 years, one cannot rule out a rapid decline in prices which would have a negative impact on the economic growth.

Any one or combination of the two global factors identified above could trigger a mild to deep correction in the financial markets and slow down the world economy. Due to the strong financial linkages with the U.S. and the rest of the world, India will not be spared.

Srinivasa Sharan contributed to this article.

Graph Source : DNA

Ironically, the financial crisis in 2008 coupled with the rapid growth of  China and India, the trade is now shifting its balance to ‘South producing for South’.

In a recent article written by Manas Chakravarty , which is based on the latest World Bank paper on the changing balance of trade, he focuses on the raising consumerism in Asia. With de-leveraging playing out across consumers, private sector and sooner or later from Governments across developed economies, consumption would raise in key southern markets like China and India. According to the World Bank paper , Asian consumers would replace the North American and  European consumers [ who currently consume 26% and 38% respectively] by contributing 59% of world consumption by 2030. See the chart in the link for more details.

It is interesting to note that the structure of these markets would be very different from the markets in the North. Being low income economies, the south will consume more food as their incomes raise. To be a producer for south, these southern countries would need to invest more in infrastructure, manufacturing  and hence the demand for commodities – be it agricultural or industrial along with energy will continue to increase.

The other change to watch out for is the price sensitive nature of the emerging economies that would lead to product standardization, which at times may lead to lower quality standards.

The large Asian economies like India do have the potential to become a new hub for consumption what with its domestic consumption, raising income levels and a favorable demographic dividend.