Economy: Greece may still default, China makes progress on ‘irregular’ debt

Updated On: Jan 05, 2012

Markets in Asia had mixed reactions to the newest development in Europe’s debt crisis. Unions and employers in Greece must agree on labour cost cuts to satisfy EU-IMF evaluation of their economy, or else the country faces an “immediate danger of uncontrolled default in March,” warned Prime Minister Lucas Papademos. Across the globe, in China, the government claims it has resolved almost half of the 58 billion yuan debt that was found to have “irregularities.”

Greece: Unions and employers must make concessions

Mr Papademos claims Greece will run out of cash in March unless the country can secure a second rescue package from the European Union and International Monetary Fund. Labor costs must be cut to satisfy the expectations of the EU and IMF, so that talks on saving the country can progress.

“If we do not make the necessary adjustments, it is to be taken for granted that we cannot expect other EU states and international organisations to continue to fund a country that does not adapt to reality and does not deal with its problems,” said the Prime Minister.

The Greek government is working on restructuring $200 billion in privately held debt, and its officials are negotiating with finance industry leaders, pension fund managers, and other investors who hold the bulk of the outstanding bonds. Progress is supposedly being made, but a detailed agreement has been long in the making.

Greece is also hanging its hopes on talks between the EU and IMF about an expanded international bailout that would carry Greece at least for another three years, giving it time to overhaul government finances and restart economic growth.

Both fronts rely on the government to fulfill various conditions, the most glaring of which are the labour cost cuts. Greek wages are far higher than in the rest of the region, and an exorbitant public payroll has contributed to an unsustainable level of government debt.

If Greece defaults, the consequences will not be localized. Fears continue to abound that the event could set off a chain reaction in the Eurozone. In Asia, the situation has led to a mixed response in the market. Credit crunch fears led to a 0.54% drop in Tokyo, 1.2% in Sydney, while Hong Kong gained 0.3%, Shanghai 0.18% and Seoul 0.17%.

Report: Greece warns of ‘uncontrolled’ default (ABC Australia, 5 January 2012)

Report: Asian markets mixed as Europe fears return (Sydney Morning Herald, 5 January 2012)

Report: Greece’s survival in euro zone linked to upcoming talks (The Washington Post, 4 January 2012)

Report: Greek prime minister warns of March default (BBC UK, 4 January 2012)

Report: Papademos warns Greek’s economic collapse looms without sacrifice (Bloomberg Businessweek, 4 January 2012)


China: Making headway on debt?

In China, 10.7 trillion yuan of debt accumulated by the end of 2010 became cause for concern that Chinese economic growth will slow and saddle Chinese banks with bad loans. Yesterday, Chinese authorities declared that local governments had cleared up half of its 58 billion yuan of “irregular debt.”

The Chinese audit office claims local governments have taken responsibility for repaying debts, setting up reserve funds, improving the stock of debt, and “actively correcting violations.” The 10.7 trillion yuan of debt included 58 billion yuan of ‘irregular’ debt that implicate five commercial banks that had been lending to questionable projects, and had also misappropriated various loans.

Economists estimate that 2 or 3 trillion out of 10.7 trillion yuan can be blamed on sour loans. According to a 2010 audit report, other problems include 46.5 billion yuan of ‘irregular credit guarantees,’ 73.2 billion yuan of loans against irregular collateral, 35.1 on stocks, houses and plants, and 132 billion yuan of irregular expenditure. The greatest problem is fraudulent and underpayment of registered capital in financing vehicles, amounting to 244.15 billion yuan. By October of 2011, only 98 billion yuan had been corrected.

Over half of the 10.7 trillion yuan debt was incurred after the launch of a massive economic stimulus program to counter the 2008/9 global financial crisis. The progress that China’s officials are claiming is hardly a victory in light of the massive amount of debt that still remains.

Report: Asian stock market, economy and companies update (January 04, 2012) (Stock Markets Review, 4 January 2011)

Report: China says local governments clear up some debt irregularities (Bloomberg Businessweek, 4 January 2012)

Report: China local government debt audit finds $84 billion problem (Reuters UK, 4 January 2012

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