Asian investors suffer as Greek fire threatens to burn Europe
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This month has been brutal for investors around the world with prices dropping across all asset classes.
It all started on May 6 when Greek elections left the pro-bailout parties at the mercy of a left-wing party which adamantly refused to join any government that would follow austerity policies agreed with international creditors under Greece’s latest rescue package.
Greece’s political uncertainty only added fuel to the debt-crisis fire. Back in January the market was already sceptical about Greece’s ability to comply with fiscal tightening. Backtracking on fiscal austerity would not only undo all containment measures already taken but would exacerbate the European debt crisis. All the previous concerns – recession in Europe, debt contagion and systematic risk to the banking system – would be on the table again. Depending on how the Greece political picture plays out, what we saw early this month may just be a preview of worse to come.
As investors went into risk-averse mode for May, oil dropped 8 per cent, gold dropped 4 and equity markets around the world fell around 3-5 per cent. The sell-off is broad-based because if the Greek debt crisis is not quickly resolved, the situation may not be contained to just Greece. Greece may be just the first piece in a domino effect. First, whenever there is heightened risk to the financial system, investors’ first reaction will always be to pull money out of investments and preserve their liquidity. The liquidity is then usually parked in some sort of US-dollar denominated investment, usually US Treasury bonds, leading to a rise in the dollar. Second, the longer the Greece debt situation remains unresolved, the greater the probability of contagion spreading to heavily indebted European countries like Spain and Italy. The worst-case scenario is that if the debt crisis widens, European banks with heavy exposure to European sovereign debt will weaken, causing systemic risk to the financial system. Consequently, what started out as sovereign-debt risk may broaden to the private sector.
Locally, the baht slumped to 31.50 per US dollar this week after dropping for a third day, a trend also seen among other Asian currencies. However local gold trading also contributed to the rise of the dollar against the baht. With the gold price having dropped substantially from 1640 to 1580, local investors who are still bullish on gold are buying physical gold. Whenever the drop in gold price is meaningful, demand outweighs supply of physical gold in the local market. Thus wholesalers will import gold from overseas and pay in dollars – hence the demand for dollars whenever the gold price drops.
Thiti Tantikulanan is head of Kasikornbank’s Capital Markets Business Division.
