You do not need to be terribly good at reading the tea leaves to
spot the alarm calls for next Monday morning. Greece will have its
general election result and Egypt may well have elected a member of the
Islamic Brotherhood as president.
Call it a double whammy if you like, and it is so obvious that
markets are going to anticipate it, then again being confronted with a
new reality is never quite the same as expecting it to happen.
New hope or hopeless case?
Greece is most likely to have elected a government that will
eventually repudiate its austerity package and yet want to stay in the
euro. Everybody likes to have their cake and eat it. That will throw the
ball back to the eurozone authorities to decide what to do: cave in or
kick Greece out of the eurozone?
Can they fudge this one so as not to interfere with their summer
holidays? It is always a big risk for European politicians and
bureaucrats at this time of year that their long planned holidays could
be disrupted. They tend to avoid it if they can by kicking the can down
the road whatever the cost.
However, financial markets may well have other ideas this year. They
have pretty much destroyed the Greek economy and will now turn on the
next weakest link. Spanish and most likely Italian bonds will plunge and
yields soar, just as we saw in Greece, Portugal and Ireland before
their rescue packages.
The trouble here is that there is not enough money to bailout such
huge economies, only a full-on federal single monetary system will be
acceptable to financial markets. But if Greece exits the euro will this
be trusted or be possible in the short time demanded by financial
markets?
Unfortunately economic crises can drag on for years. It is five years
since the US subprime lending market came unstuck. Such crises can also
get very much worse before they get better and, as in the case of
Greece, they can wreak havoc in the meantime.
That brings us to Egypt, which is the focus of attention this weekend
across the Middle East and North Africa. Islam has a very powerful
record as a religion but as a political and economic force you would
have to be very charitable not to admit a less than stellar recent
performance.
Islamic Republic of Iran
If we look to the Islamic Republic of Iran as an example the model is
rather like the old communist bloc in Eastern Europe: state controls,
centralisation and poor economic management. Modern Egypt has never
actually been a shining star among the emerging markets but it is hard
to see how its economy will benefit from this solution.
It’s the third largest economy in the region, however, after Saudi
Arabia and the UAE, and by far the most populous nation so what happens
in Egypt certainly does count. And if this is where the Arab Spring is
taking the regional economy then it does not set a very good precedent.
Global financial markets won’t like an Islamist president of Egypt or
the colour of the new government in Greece but they will almost
certainly have them by Monday morning. Expect a Black Monday!
You would have to wonder then in this context whether financial
markets are in for another summer dip or something more profound. This
has been the pattern for the past two years:
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