The economic recovery has been a fragile creature, particularly in Europe. Despite Mario Draghi’s quantitative easing binge, growth has been sluggish. Naturally, the more neurotic among us have kept our eyes peeled for the crisis that will plunge us all back into recession.
The obvious harbinger of our impending doom has been Greece. Over the last couple of weeks, the country has stormed out of bailout talks, defaulted on the IMF, watched its banking system collapse, then decisively rejected its creditors’ terms in a snap referendum.
European leaders have now given PM Alexis Tsipras until the weekend to present them with a bailout proposal German voters would find acceptable (don’t hold your breath).
It’s been so dramatically cataclysmic that it has perhaps obscured a far greater threat emerging in Asia. China’s stock markets have lost a third of their value in the space of a few weeks, as the People’s Republic desperately tries to avoid a 1929 Wall Street Crash doomsday scenario.
So which one should be keeping us up at night?
Have no doubt – Greece is up a certain creek without a paddle. Its financial system has been locked down since the ECB decided not to increase emergency liquidity assistance over a week ago.
Despite a €60 (£43) cap on ATM withdrawals (which might drop to €20 by the week's end), the banks are running out of cash, while capital controls are cutting off the nation’s import lifeline.
What impact this will have on the rest of Europe and the world depends on what happens next. If Greece reaches a bailout deal, Europe will probably step in to recapitalise the Greek banks. The creditors would likely lose out of restructured debt, but it wouldn’t be anything they couldn’t handle or didn’t expect.
If Greece can’t make a deal, it would probably have to leave the Euro and resurrect the drachma. Tsipras would be wise in that case to default on Greece’s debt in its entirety, which would involve a bigger shock to the global economic system, but again, not really an unexpected one. To an extent, Greece has already been ‘quarantined’.
While Europe has been navel-gazing over the fate of the world’s 44th largest economy, a country with a GDP 40 times bigger is having a crisis of its own. The fall in the value of its stocks has been precipitous, with the two main indices in Shanghai and Shenzhen having declined by a third since mid-June, after having enjoyed a year of rapid growth up till then.
The Chinese state is frantically trying to shore up the markets, suspending trading on over half the listed stocks and buying shares with money from the People’s Bank of China, but it hasn’t stopped the rot. The Shanghai composite index fell a further 5.9% yesterday.
The danger is that Chinese retail investors, who own most of the country’s equity, could lose so much money if the bubble bursts that it chokes demand in an economy trying to move away from investment-led growth to consumer-led growth.
The consequences for everyone else of a sudden slowdown in China could be dire. It is the engine that powered the world through the recession. If it stalls, it could drag everyone else down with it.
China did experience an even bigger stock market boom and bust between 2005 and 2008 (there was a sixfold increase, followed by a 67% fall over one year), and that didn’t derail it then, but with baseline growth lower now and an economy more demand-driven, the risk is surely greater.
Greece is the more immediate threat and the more likely to produce a shock to the global economy, but China is ultimately the more dangerous, especially if it hits its banking sector. As it grows larger and more sophisticated, the Asian giant becomes more and more likely to have a Lehman moment of its own, and when that happens we’ll all know about it.