Italy is next to Greece? Nothing is New
Italy is next to Greece? Nothing is New
  • Jeon Byeong-seo, Professor of China MBA in Kyunghe
  • 승인 2011.07.19 16:52
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Jeon Byeong-seo, Professor of China MBA at Kyung Hee University

Europe is now burning. FIRE is the combination of the initials of the three words - Finance, Insurance and Real Estate. The cradle of the large-scale finance and real estate accident is the United States, but the fire broke out in Europe. Greece is nearly entering the funeral parlor. And next is Italy.

If the god of stock investment is Warren Buffett, the legend of bond investment is Bill Gross of Pacific Investment Management (PIMCO). In an investment report worked out by Bill Gross last February, there is an interest chart, called the "ring of fire," in which investment should be banned. Spain and Italy are in the ring.

Although the U.S., Britian, France, and Japan are also included in the ring of fire, they are not burning to death as they have machines printing key currency or quasi-key currency.

No country collapses because of the financial crisis

Now, the world is facing the crisis after the crisis. Following the financial crisis, the crisis of state bankruptcy is approaching from Europe. In addition, there is a concern over possible bankruptcy of Japan and the U.S. owing to enormous amount of fiscal deficit.

If Greece goes bankrupt, a war seems to break out in the whole world. Viewing the cases of state bankruptcies in the past, however, it is not so desperate.  It is because a currency financing system that can increase debts unlimitedly by printing money freely. Not only the U.S. but also Europe can print money unlimtedly.

Countries with a money printing machine can print money to boost the ailing economy, but those without such machine can repay debts through painful retrenchment, a hike in interest rate and asset sales. Accordingly, Greece and Italy are in a serious condition, but the U.S., Britian, France and Japan are relatively carefree.

Italy is the next greece

Financial institutions in the U.S. and Europe are pretty much in the same boat considering their intricate relationships. As a result, they always want to relieve each other.  For instance, Britain buys U.S. bonds even if it goes bankrupt, and the U.S. supports European financial institutions.


China's soft landing

A number of Western pessimists have a thought that if China makes a hard landing owing to the debt problems of provincial governments, overheated real estate business and uncontrollable inflation, a serious accident will occur.

The total debts of Chinese provincial governments came to 10.7 trillion yuan. In addition, about 1.4-1.5 percent of loans extended by financial institutions are presumed to be bad loans.

The GDP growth rate of China slowed down by 0.2 percentage points from 9.7 percent in the first quarter of 2011 to 9.5 percent in the second quarter, posting the fifth consecutive fall since the first quarter of 2010.

Since 2010, the Chinese government has employed a retrenchment policy for fear of overheating the economy. Despite a concern about a hard landing, all economic indicators, excluding commodity prices, seem to have made a soft landing. The monetary growth rate lowered to 15 percent, the industrial production increase rate stood at 14 percent, and the consumption increase rate remained at 17 percent. Fixed asset investment remained the same at 25 percent.

Although commodity prices soared by 6.4 percent owing to a surge in prices of vegetables and pork following the natural disaster, the inflation rate is expected to calm down by July of this year.

The U.S. cheers a 2 percent growth, but China regards the 9 percent growth as a soft landing. In fact, I feel that China's power is becoming bigger.

Europe's crisis is the Asia's crisis

As European investors shocked by their uneasy financial status continued selling their stocks in Asia, the Asian stock market entered into a state of panic. However, an interesting matter is that stocks in the Asian market do not fall under a certain level anymore. What is the reason If Europe collapses, Asia will be bright because Asia looks fresher than Europe.

The U.S. and Europe, whose industrial structures completely moved to the service industry, saw their manufacturing industry fall into the doldrums. Because of the financial crisis, there are few people to purchase top-tier consumer goods in those countries. Accordingly, it is very difficult for the countries to see a rapid rise in employment and speedy consumption recovery.

Reflecting this phenomenon, Prada, a European luxury brand, aims at consumers in China and other Asian countries, not those in the U.S. and Europe.

Despite a global economic slump, China's exports have enjoyed double-digit growth. Its trade surplus also posted the year's high of $22.2 billion in June despite a sharp rise in imports.

Owing to the financial crisis of the U.S. and Europe, Asia looks like it will go bankrupt in the near future. But if we look into Asia closely, we can find that is a mistake. The manufacturing industry in Asia is still alive. As a result, in case of an economic recovery in advanced countries, Asia can supply daily necessities and durable consumer products to advanced nations. Even if advanced countries suffer from a slumping economy, Asian countries can export their cheap products to them.

In case of an economic slowdown or financial crisis, advanced countries print money to supply liquidity, and the liquidity flows into Asia enjoying robust growth. It is the reason why Asian stock markets do not collapse despite the financial crisis of advanced countries.

The place where consumption is alive is Asia, not Europe or the U.S. Financial institutions in the countries with brisk consumption are relatively healthy. Because of the debt problem of the Western world, an economic downturn is inevitable. However, if the situation in the Western world becomes worse, the degree of attractiveness of Asia will go up further. Despite the crisis in Europe, the prospects for the Asian market, including Korea, seem to not be so bad.


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