A growing debt crisis is rocking Europe and threatening the stability of the eurozone. Sergei Seninsky, economics analyst for RFE/RL’s Russian Service tells us briefly how the crisis has reached this point and explains why Russia might be better positioned to weather this storm than it was during the 2008 global financial meltdown.
RFE/RL: Why is the financial crisis in Europe being called a “debt crisis”?
Sergei Seninsky: This crisis arose when the volume of state debt accumulated by the individual countries of the eurozone greatly exceeded the maximum level while at the same time their national economies were growing too slowly to bring into state coffers enough money to service that debt. And since there is no single financial-policy center in the eurozone — that is, there is nothing like a joint finance ministry — each country conducts its own monetary policy.
Economics analyst Sergei Seninsky
And national tax systems can be quite different from one another. As a result, in some European Union countries, state expenditures match state expense, while other countries spend considerably more than they realistically should, considering their revenues. Most importantly, we are talking about the widest range of social programs, as in Greece or Portugal, or about anticrisis measures to help banks, as in Ireland.
The deficits that arose were covered by increasing national debt: more and more loans (financed by the sale of state bonds) were needed to service these debts.
But at some moment a debt becomes so big that a country can no longer service it by itself — that is, it cannot pay the principle or the interest on time.
That country finds itself in a debt crisis and is forced to ask other countries for financial assistance. In Greece, Ireland, or Portugal, the reasons the debt crisis arose might be different, but the result is exactly the same.
RFE/RL: What is the danger for the eurozone as a whole if Greece defaults?
Seninsky: Most important is the so-called domino effect. The default of one eurozone country would lead to a sharp rise in the cost of new loans on debt markets for other “problem” countries in the region.
Hydrocarbons account for 70 percent of Russian exports and the overall demand for them, even during a period of economic contraction in the consuming countries, will fall much more slowly than demand for other goods.
In addition, the major eurozone banks, which earlier invested billions of euros in the bonds of these countries, would suffer because the value of those bonds would fall sharply.
Banks would try to cover these losses by cutting lending to national companies which, in turn, would lead to a great slowdown in economic growth in the eurozone countries.
And finally, more than half of all European exports go to other countries in Europe. So a reduction in demand in some of them would impact the others.
RFE/RL: And what impact on Russia’s economy might an expansion of the European financial crisis have?
Seninsky: Even if you suppose the worst-case scenario for Europe — an economic recession, that is, minimal economic growth or even some decline — the impact on Russia this time, it appears, would turn out to be rather minimal.
Russia’s economy — like those of the other former Soviet countries, except for the Baltic states — remains quite isolated both from the European economy and from the global economy at large.
Hydrocarbons — oil and natural gas — account for 70 percent of Russian exports and the overall demand for them, even during a period of economic contraction in the consuming countries, will fall much more slowly than demand for other goods.
Gas tanks need to be filled and power stations need to be fueled no matter what. As a result, the global price of oil, if it falls, won’t fall catastrophically for producers.
And if it does fall sharply, as it did in 2008, then the decrease won’t last long. Three years ago, the global financial crisis impacted on Russia immediately.
In a matter of days, Russian banks lost access to cheap Western loans from — primarily — European banks. That was the reason for the economic downturn in Russia in 2008-09.
But now the European banks are unwilling even to give loans to one another, to say nothing of lending to banks in other regions.
Russian banks now have significant domestic reserves that were formed primarily thanks to the recent anticrisis measures by the government and the central bank.
Demand for new loans by Russian companies is only just recovering after the recent economic downturn. As a result, Russian banks have considerable resources available to them.