Many people are wondering why the Greek economy is having such a major effect on the global markets. Why is such a small country making the world’s major markets rise and fall with every headline that comes out regarding their possible economic collapse? Fear of the unknown is driving the seemingly schizophrenic markets up and down like a yo-yo. When Greek Prime Minister George Papandreou presented the idea of a referendum on the bail out uncertainty and fear grew to a fevered pitch. The masses in Greece did not want to submit to the changes that would be required by the European Central Bank (ECB) for the new bail out loan, but the government believed that without it the economy will totally collapse. There are two major components to this issue. First is the chance of Greece defaulting on the bailout loans that they have already been given. The second has to do with the chance that they could pull out of the Euro as a currency.
When we consider the problems that would occur if Greece defaults, we have to look at how this would affect the lender countries. Large banks in Germany, France and England have propped up Greece with loans. Greece is not an insignificant economy and it’s failure would send ripple effects throughout the world, think “too big to fail”. They are also intricately linked to Greece through the European Union (EU). Many think that if Greece defaults, other members might default as well. The Wall Street Journal stated, “The decision by Greek Prime Minister George Papandreou to shelve the poll capped a tumultuous few days that thrust Athens to the brink of political chaos and forced Europe’s leaders to contemplate Greece’s exit from the single currency.” Source That brings us to the other major issue. Greece might pull out of the Euro as it’s national currency. As the seventeen member nations of the EU consider the possibility of Greece rejecting the euro the fear is that other member nations may also follow suit. This would cause a major destabilization of the remaining EU member’s currency and ultimately their economies.
Some think this is just a problem for the EU, saying, “sure it will impact us but it isn’t really a problem for the United States.” Unfortunately that is not true. Many of the large American banks issued default insurance to the banks that were lending to Greece and other struggling nations. If Greece (et al) default, then these major US banks will have to pay out billions to cover the losses. These are many of the same big banks that were bailed out by the American taxpayer just a short time ago. Their “toxic” debt was graciously passed on because the government deemed them “to big to fail”. Sound familiar? So there is a very good reason for us to keep our eyes on the developments in Greece and other EU countries that are at risk of default. Now, it would seem that we’re tied to their future.
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