Greek debt too small to cause second GFC

The sovereign debt issue in Greece is unlikely to lead to a second round global financial crisis, but public debt crises in advanced countries are likely to be a recurrent problem.

Dr Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors, said that although there is a high risk of a broader public debt crisis, the amount of debt involved in southern European countries such as Greece, Spain and Portugal is small compared to the trillions of dollars involved in the US mortgage market.

The exposures are more transparent and the risks better understood now than they were during the sub-prime crisis, he added.

Global monetary policy is easier now, and the global economy is also much stronger now than in 2008, he said.

The €720 billion bailout announced by the European Central Bank also shows that policy makers are determined to get on top of the problem and put and end to irrational contagion, Oliver said. It also means Greece is unlikely to default in the short term, he added.

“If the package is successful in stabilising the public debt situation in Europe it should help to contribute to a recovery in global share markets once the dust settles from the current correction,” he said.

“The European support package has likely provided a bit of breathing space to troubled economies,” Oliver said.

“However, it provides a longer term reminder that high public debt levels will be a key constraint on major advanced economies in the years ahead as well as being a key risk factor to keep an eye on.”