Greece: The tip of the large iceberg?

BANGALORE, INDIA: In the second half of 2011, business media covered the Euro zone sovereign debt crisis from the perspective of financial markets. In the first half of 2012, the crisis has not gone away, but there is less volatility in stock markets and currencies. Is it calm before the  storm? How does it impact European banks and European businesses? This column will cover such topics from the perspective of Indian IT professionals and Indian IT exporters.

Of course, there is uncertainty in the Euro zone. Uncertainty prevails even in the US in an election year! Could the Euro zone crisis offer a new “window of opportunity” for Indian IT exports? As explained in a forthcoming article, this crisis could be a “game changer”, just like Y2K! Unlike Y2K where there was a fixed deadline, the Euro zone crisis is comparable to a slow game of “snake and ladder” in the global economy. The players (especially European politicians) will make the moves at their pace and convenience!

Let us get started. Why did experts compare Greece in 2011 to the Lehman crisis of 2008? Greek sovereign debt is in hundreds of billions of Euros. If its creditors (especially global banks) are not paid on time, derivative instruments (credit default swaps) could be triggered. This could have led to a chain reaction in the global financial system. What began as a risk of sovereign debt default by Greece has now spread across the Euro zone in 2012.

Greece is the tip of the large iceberg. Since July 2011, borrowing costs of Spain and Italy shot up. Their economies were already weak since 2008-2009. Even though Spain and Italy are not close to a default, they face new challenges in 2012. Since 2008-09, Spain had high unemployment and suffered the housing bubble. High borrowing costs affected its banking system in 2012, forcing the Spanish government to request for a bailout. In Italy, the problem is not about the health of the banking system. It is about fiscal discipline, slow growth and lack of competitiveness. Italy is too big to be bailed out!

How does the Euro zone crisis affect the clients of Indian IT exporters? The crisis has resulted in cross currency volatility, where the value of the Euro fluctuates relative to other currencies, affecting Euro zone exports. As the crisis drags along, European banks and European businesses face more uncertainty. With slow and uneven growth, each of them faces a different set of challenges. European business must become more competitive to survive and grow. In the long term, the crisis could lead to a paradigm shift in the global economy. The competitive landscape across the US, Europe and Asia could change.

One could compare the Euro zone crisis to the churning of the ocean of the global economy. The fallout may be good or bad. Should the Indian IT juggernaut navigating the high seas get worried? Is the glass half full or half empty? The articles that follow in this column will answer such questions.

(K R Kashyap has over 25 years of experience in the IT industry covering project management, risk management and business development functions. In this column he will cover topics related to the global economy and their implications for Indian IT exports)