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A Depression in Greece?

In the latest Duke/CFO Global Business Outlook Survey, Europe's finance chiefs say austerity programs could hobble European economies.

Having survived a confidence vote on Tuesday, the Greek government is set to approve new austerity measures in another effort to right Greece’s economic ship. But European CFOs say such measures have a nearly one-in-two chance of plunging the country into a depression.

Greek Prime Minister George Papandreou has proposed cutting 150,000 government jobs and reducing government salaries in addition to an array of new taxes and sales of government assets. Such moves are deeply unpopular in Greece but are required by international lenders that are expected to inject more funds into the ailing Greek economy. The finance ministry estimates the cuts will amount to some $40.5 billion between 2012 and 2015 and will bring the country’s deficit down to the European Union’s target level of less than 3% of gross domestic product.

But European finance chiefs polled by Duke University, Tilburg University in the Netherlands, and CFO in the second-quarter Duke University/CFO Magazine Global Business Outlook Survey say such a severe austerity program in any of Europe’s most-troubled economies puts the likelihood of a depression in that country at 48%.

Indeed, Campbell Harvey, professor of international finance at Duke’s Fuqua School of Business, says depression in Greece is a near certainty. “Greece will go into an economic depression,” he predicts. “With a free-floating currency, there is an automatic adjustment mechanism — devaluation. With a currency union, there is no such mechanism, and the only alternative is austerity and wage cuts.”

Where does Greece go from here? Without additional external financial aid, the country will default within a year, according to 80% of European CFOs. And if Greece defaults, a majority say it is somewhat likely that Spain would then require a bailout as well, due to the spillover of concern about its Mediterranean neighbor. A majority of European finance chiefs say policymakers should opt for a restructuring and impose a haircut on Greek debt holders, while 32% say they should delay restructuring and inject more cash into Greece.

For now, however, it appears that the European Union, the International Monetary Fund, and the European Central Bank will provide additional funds to Greece, which needs $17 billion by mid-July to avoid default. Still, Harvey says, “The best thing that could happen is for Greece to default. I am very much in the camp of ‘Get the pain over early rather than kicking the can down the road.’”

For U.S. finance chiefs watching television footage of riots in Athens, there are two major worries. The first is that many European markets are clearly in for a long recovery period, and perhaps a second dip into recession or depression, so those who count Europe as a key end market will face significant hurdles to growth there. Second, the drawn-out crisis and response add to many CFOs’ general feeling of uncertainty about the global economy. Treasury Secretary Timothy Geithner echoed this concern on Tuesday, saying, “It would be very helpful to have Europe speak with a clear, more unified voice and strategy.”

On a brighter note, says Harvey, “It is important to realize that this crisis will not last forever. We are in for a few bad years, but not necessarily 10 bad years.” As for U.S. CFOs, he adds, “there will also be some good investment opportunities.”

 

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