Greek Debt Crisis, and Its Effect

Greece has another story. Yesterday the Government in the land of the gods have laid off no less than 15,000 civil servants, in order to save the budget. Beyond that, some media 'sentenced' two European countries, namely the Netherlands and Italy, as the country that has also been following the Greek to fall into the crisis. Such bad news? Of course. But miraculously, one of the world's major stock indices, the Dow Jones, instead affected and down, it continues to rise and is one step closer to penetrate its new level at 13,000’s. Then how about the Jakarta Composite Index (JCI)? Same thing. When this article was written, the JCI was at peak, ie above 4,000. An anomaly?

Today, Greece is already in crisis, not just feared to be hit by the crisis. While the other European countries, although not as severe as Greece, also showed declines in their respective economies. The only European country that still seems far from the crisis is Germany. Beyond that, several European countries including the big ones such as Spain, Italy, France, to England, all of them has had the economic decline.

But in Indonesia, the effects of the crisis were not felt but a little. If some of the Greek civil servants has to find a new job, the Indonesian civil servants enjoyed a rise in their salary of about 10%. But this different ‘fate’ is not without reason, because the Indonesian economy is currently in a good state. In 2011, Indonesia's economy has grown 6.5%, the highest in the last five years. The average exchange value of Rupiah against the U.S. Dollar in 2011 was recorded Rp8,700 per US$, the strongest in the last five years. Inflation rate during the year 2011 was 3.8%, the best in the last five years. Want more? Value of net foreign direct investment (FDI) into Indonesia by the end of the third quarter of 2011 had reached US$ 14.8 billion, the highest in the last five years! At the end of 2011, the figure could be even greater.

So is that the reason why JCI continues to be at the top as it is today? Could be. But then what about the negative economic influence from Greece? Is there a possibility that JCI would fell like crisis of 2008? To answer these questions then there are some things we need to consider here.

First, when asked how much the influence from the Greek crisis on the Indonesian economy, then the answer is depend on the economic relations between the two countries. And it can be seen from the balance of trade between the two countries. If Greece was one of the major destinations of Indonesian exports, then when the country fall into crisis, Indonesia will be directly affected, in which the companies who export its products to Greece would lose their revenues. And if it happens in a lot of companies, then the Indonesian economy as a whole will be under pressure.

The good news, according to the latest data from the Central Statistics Agency (Badan Pusat Statistik/BPS), by the end of 2011, Greece was not one of Indonesia's main export destinations. The main Indonesian export destinations in Europe are Germany, France, and England. Okay, but what if France or England also fall into crisis? And it was already mentioned above, is not it? Fortunately, the value of exports of non-oil products from Indonesia to France and England were only US$ 3 billion, or reflects only 1.9% of the total value of Indonesian non-oil exports to all countries around the world.

And this figure is in contrast with China, or United States of America. In 2011, the value of non-oil exports from Indonesia to China and the US were US$ 21.6 and 15.7 billion respectively, or reflecting 13.3 and 7.7% of the total value of Indonesian non-oil exports. So it is explained that when in 2008 the U.S. fell into crisis, Indonesia is directly affected. If you noticed, most investors are more concern to the decrease in the economic growth of China (from a peak of 13% to just 8%), rather than the Greek crisis. The reason is obvious: No matter how bad the Greek crisis is, Indonesia would not be affected but maybe just a little. Meanwhile, if China is in crisis or something, then it is not impossible that the JCI would collapsed like in 2008, or even worse.

Besides the issue of trade connection between the two countries, there is one thing that also need to be considered: What is the potential losses that could occur if Greece is eventually default? Okay, let's check. Greek’s current debt position (after adjustment) is € 350 billion, or about US$ 450 billion. In comparison, when Lehman Brothers collapsed in 2008, the compny left debts of about US$ 900 billion (that extreme figure is came from a single company only!). If combined with debts of other bankrupt companies, including Merrill Lynch which was then taken over by Bank of America, then the value of the default was US$ 4 trillion. With that extremely huge losses, it is reasonable if the whole world in 2008, including Indonesia, fell into the crisis.

So if Greece is really default, then its effect will not be as hard as the effect of the global crisis in 2008, because the value of the loss is 'only' approximately US$ 450 billion, far smaller than the loss of US$ 4 trillion as a result of the subprime crisis in 2008.

One more question, could a country really bankrupt? If a company goes bankrupt then it will be dissolved or taken over by other companies. But if a country like Greece goes bankrupt, then what will happen next? Would it acquired by Italy, or what?

Systemic Impact?

Other than the small size of the Greek economy, there are things that may still need to be researched related to the Greek crisis, one of them is: What if the crisis spreads across the Europe, or even the world? What about the domino effect after the Greek is actually default?

Well, when viewed from here, then the story could be different. Indonesia does not have a significant trade relations with Greece, but the Indonesian non-oil exports to the European Union as a whole were 12.6% of the total value of non-oil exports. Yup, the value of Indonesian exports to the EU as a whole is about the same as the value of Indonesian exports to the United States. So if the entire European Union fall into crisis (or economic decline, you name it), then Indonesia will inevitably be affected.

And the possibility of such domino effect is can not be ignored. When the crisis first started in 2009, the actors were only Greece and Portugal. But then the crisis spreaded to Ireland, Italy, and Spain, although the three countries only suffering declines in their economics (cannot be said as crisis). And now, almost all countries in Europe except Germany are threatened by the crisis. So, although Greece is just a small piece of cake, but what if the  European Union (as a whole) fall into crisis?

Maybe that is why the President Susilo Bambang Yudhoyono said that the government is targeting economic growth of 6.7% in 2012, but with a note that the global economy is not collapsed or the like, which means that the government is well aware that the risk of the global crisis is still out there.

So related to the JCI, the conclusion? Well, we know that the market is unpredictable, but as we’ve discussed everything above, then the conclusion is yours.

Original article was written at February 22, 2012