The day before Dow Jones had a historic hiccup attack. We witnessed a development from which many lessons can be learned. Nowadays everyone's discussing 'How can the stocks of Accenture fall to one penny even for seconds?' They argue that there certainly is an error and that trading errors shall be monitored by a program. It was even discussed that stock exchange executives started to sort out the erroneous transactions. Whatever the reason is, US stock exchanges and trading systems went through a rapid fall in prices. In the meanwhile, billions of stocks were traded. Then prices surged a little. But actually this was a fortunate development. This way we all saw in advance how tense the nerves of the markets were. Trading errors are always seen in stock exchanges. However it is most likely that this time the magnitude of the energy accumulated in the market revealed itself also as a result of a trading error. Such an 'earthquake rehearsal' in the eve of Germany's decision was a good thing to happen.

Today let me break a new ground and make the first diagnosis right after the first paragraph: The day before we tested how the Greek crisis made global markets tense. The steep fall in the stock exchanges stems from the widespread anxious wait. So the question is why are the global markets so tense? What leads to tension in global markets is the risk that the crisis in Greece spreads all around the world. Markets are right to be anxious; because the contagion effect of the Greece crisis will not be similar with that of the previous crises. Let us see why this is so and why the market will be just like in the anecdote: 'No one will be able to fall asleep as they will be waiting for other shocks.' We are to witness hard times.

In the past when we were studying economics, concepts like 'contagion effect' were not yet invented. The concept contagion effect emerged following the financial crisis in Thailand, Korea, and Malaysia in 1997. Remember, the first problem emerged with Thailand's currency baht. Then the crisis hit all South East Asian countries one by one. So the second point to make is, the term 'contagion effect' was used only for developing countries. Why would a crisis in once country transmitted to another country? The reason is quite simple: the disease was transmitted between countries through the portfolios of international financial institutions. It was when we learned that portfolio management strategies can transmit a crisis from one country to another. These institutions were holding in their balance sheets the financial institutions of the respective countries. Therefore, if there erupted a crisis in one country two mechanisms worked. First, when leaving the country's market, they also sold the assets of the country which they put in the same category with the country in crisis. This way your country would have been damaged even if you had no relation with the crisis incidence. Then, why was Thailand and Korea, for instance considered in the same category? In fact, you do not need a major and drastic reason for this. It could be anything; that slant-eyed people lived in both of the countries or that neither of them used forks, etc. Contagion was also related with illiteracy; and it still is. The Chairman of the IMF said "Portugal is not the same with Greece" for a reason.

Therefore, it is hard to make a differentiation between countries which occupy the same group in your portfolio. The second technical reason pertains to assets of countries which are in a different portfolio group and which are highly profitable. In that case, in order to limit the loss incurred by the countries in the other group, highly profitable assets can also be sold off. So what happens? Financial assets of a country which has no connection with the crisis are put on the market and the currency of the country starts to depreciate. This is exactly what the contagion effect tells us. The designing of portfolio management techniques paved the way for contagion. And this is the third point to state.

Greece's crisis, however, is different in three ways. First the incidence occurs in a developed country. Second the crisis emerges within the Eurozone. And third the value and weight of Euro in international portfolio is too large to be compared with South Eastern Asia. Let us start with the last one: international fund flows mainly take place between the USA and European Union countries. A substantial proportion of fund flows do not go out of this limited area. Therefore the losses here cannot be compensated for easily. Portfolio losses cannot be assessed based solely on the GDSs of Greece. So the issue is closely related with the weight of Eurozone in their portfolio. This is the fourth point to underline.

And the fifth one: The institutions selling the government debt securities (GDSs) of Greece will switch from Euro to dollars. Thus, during this process Euro will depreciate and interest rates in Euro denominated assets will increase. This is the circumstances that currently does and will apply. The weight of Euro in portfolios elevates the tension.

Politics create problems in the economy. This is bad; both for Germany and Turkey.

This commentary was published in Referans daily on 08.05.2010