Fear factor

Wall Street dropped 2.5% last month on fears that the Greek debt crisis is getting worse, and spreading through Europe.

Last night there were rumours that Spain is now seeking a giant bailout (these were emphatically denied); there were protesters swarming the Acropolis urging citizens of Europe to “rise up”; and there is growing speculation that banks around the globes are set to be hit with massive, trillion-dollar losses if it all goes pear-shaped on The Continent.

It’s all very dramatic, but is it really anything for Australian entrepreneurs to get worried about? The Greek bailout is agreed and happening, the protests are an everyday occurrence in Greece and the Spain bailout rumour is just that. There is a very good argument that markets are largely getting spooked over nothing.

That appears to be RBA Governor Glenn Stevens’ opinion too. In his statement following yesterday’s rate rise, he said that “to date, there has been very little contagion outside Europe” from the Greek situation.

Stevens is right, for the moment at least. While global markets remain extremely nervous about the state of Greece and wider debt problems in Europe, it doesn’t seemed to have fed through to higher funding costs for local banks, which would then feed through to higher lending costs for Australian customers, particularly business customers.

But as Robert Gottliebsen argues today, if the worst was to happen – if Greece was to default, causing huge losses for the banks around the globe and higher funding costs for local banks – Australia would be in an interesting situation, having raised the cash rate sharply over the last nine months.

While a Greek default wouldn’t necessarily worry Australian consumers and businesses, the prospect of banks passing on higher rates at a time when official rates have already risen quickly would be likely to shake consumer confidence.

Entrepreneurs need to keep a close eye on the situation, no matter how ridiculous things get in Athens.

It’s also worth pointing out that while the Greek situation continues, we are unlikely to see many foreign banks entering the Australian market to provide some much needed competition.