So, what effect will a euro crisis have on Thailand?

     A default by Greece would start a chain reaction in the financial markets that would likely have more adverse effects on the global economy than the Lehman Brothers bankruptcy of 2008. With Greece’s public debt at around 140 per cent of GDP, there are large amounts of Greek bonds in the market being held by European banks and investors. If Greece were to default, those banks’ equity would be wiped out. The value of Italy and Spain’s government bonds would likely fall as investors fled on the assumption that those bonds would be the next to default.
     Global equity markets have already expressed concern about the potential default risk, as European banks’ equity value has fallen by an average of 40-50 per cent so far this year.
Therefore, it would seem there is every incentive for Greece not to default, right?  Economically, yes, but politically it is another story. Germans are right to be asking why they should have to support Greece with their hard-earned export money and fiscal discipline.   Currently Greece is trying to a negotiate a “haircut” with creditors, while the so-called troika of the European Commission, ECB and IMF is providing ¤110,000 million (Bt4.58 trillion) in liquidity for Greece to roll over its debt. The money, however, is not without conditions.  Greece must comply with the troika’s demands, which are a) a reduction of public debt b) reduction in budget deficit, and c) privatisation of Greece state enterprise assets.
While the plan is logical and sound on paper, in practice, compliance will be more difficult. Workers and ordinary citizens are protesting against the government’s belt-tightening and this is putting elected officials in a dilemma. Last week the troika withheld the second tranche of funds in order for their auditor to confirm Greece’s accounting. News of the delay caused the equity markets to fall 5 per cent overnight.
The other, and more likely scenario, is that Greece is able to hold off defaulting. In order for his to happen, it is likely that European governments will need to print money to keep the debt repayment intact. This is in the same mould as actions taken by the US following the Lehman Brothers collapse. By printing money, the euro zone will be injecting liquidity into the system. This will keep the financial markets afloat, but could also create an adverse side effect, namely inflation. Too much money will be chasing too few goods. Hard assets such as property, commodities and gold will go up in price – a replay of 2009.  
So what effect will the euro debt crisis have on the Thai economy? In 1997 when Asia went through the financial crisis, the US and the euro zone were prospering. In 2008 when the US was hit by financial crisis, the euro zone and Asia were still expanding. If we have a euro-zone financial crisis in 2011 or 2012, Asia will be the only healthy continent left. The chances that Thailand will not feel any adverse effects will be very remote.

Thiti Tantikulanan is head of Kasikornbank’s Capital Markets Business Division. Views expressed are his own.