The economic impact of Eurozone debt

Often referred to as Wall Street’s ‘fear gauge’, the VIX was reflecting concern that, at best, Greece, Spain and Portugal would adopt austere measures to rein in government spending, potentially shaving a few points off global economic growth.

At worst, it was feared Greece would default and take its indebted Mediterranean neighbours with it, knocking the wind out of the European banks that had made the loans.

The contagion could even jump the Atlantic.

Europe could be headed for a double-dip recession, the doomsayers reasoned.

It might be the global financial crisis, part two, made all the more likely because Europe had bickered about its response to Greece’s crisis. 

That left bond investors to re-price the nation’s debt before a 750 billion euro package was finally agreed to allow nations to refinance debt that the market might not touch, or would price too highly.

Underlining the lack of European unity in dealing with the crisis, Germany’s subsequent response to its tumbling markets - banning naked short selling of some securities - was imposed without consultation with neighbours like France.

In the event, the VIX peaked out at about 46 on May 20 - only a little over half the height it reached in late 2008, when Lehman Brothers collapsed and the global crisis became full-blown.

It has since eased back to about 32, while the Greek 10-year bond, which yielded 12.6 percent on May 8, has fallen back to 7.9 percent.

For the moment, at least, markets have breathed a sigh of relief, having panicked and pushed yields out to junk levels some weeks before the ratings agencies blew the whistle on the weak southern European economies.

A different kind of dilemma

Those driving these reactions also know that the global financial crisis and the Greek fiscal crisis are different kinds of dilemmas.

The global crisis was driven by private financial institutions and their propensity to package up securities backed by low-quality assets, such as sub-prime home loans, into a house of cards.

With Greece, it is public finance that is awry. Government debt was 115 percent of GDP last year and is forecast to reach 150 percent by 2014.

Compare that with New Zealand's net public debt topping out at a little over 30 percent of GDP in the next four years, and the scale of the problem is clear.

And because it's part of the Euro-zone, Greece doesn’t have the option of quantitative easing - otherwise known as printing money, which was widely used during the global crisis - to slog its way out of trouble.