Fariborz Moshirian

There has been a re-run of the Greek debt crisis which has triggered volatility in share prices around the globe. The present turmoil is likely to continue for some time to come.

 

We have to accept that the markets will remain fairly volatile, at least during September, because a number of European parliaments have to pass their recent agreement on debt and bonds to the European financial stability fund. The market is not very sure that the German parliament, among others, is going to pass this special fund.

Greece’s chance of default in the next five years has soared to a virtual certainty, based on a standard pricing model that assumes investors will recover 40 percent of their bonds’ face value, should Greece fail to meet its obligations and pay on the due date.

I feel the solution is greater financial integration by euro zone governments. Germany and France now are showing more determination to address the underlying causes of the financial crisis and they realise that their economic prosperity lies in ensuring that other euro zone member countries also prosper. The leadership and political process has been very difficult, simply because the eurozone – unlike the United States or Australia – doesn’t have a federal government.

Greek Prime Minister George Papandreou has so far failed to reassure international investors that his country can survive the euro-region crisis, and the risk of contagion beyond Greece has pushed sovereign credit-default swap prices to record highs across the euro region.

The EU already has monetary union. Now they have to establish fiscal and public finance union. That is the major challenge, but I think it will be possible. And I think it is in the national interest to slow down the process of unification within the euro zone, to ensure we have much more of a fiscal connection between different countries within that zone.

While we should be concerned about the position in Europe, our investment banks are in a better position, and we have far less debt. It is unlikely that the contagion will have much impact, other than giving our share prices a rollercoaster ride.

Fariborz Moshirian is a Professor of Finance at the Australian School of Business.