Only six years ago Greece seemed to have returned to its golden age: Host of the Summer Olympics and European Nations’ Cup Champions in football (er, ‘soccer’). But the bill has been delivered, and no one seems willing or capable of paying. The economic and political unrest turned violent recently, as the government continued to impose tax hikes and slashes on public spending. Greece’s debt, ranks it as the as measured against its Gross Domestic Product (GDP) (170.5%) (the with 96.5% debt-to-GDP and at 1312%. No, we did not forget a period in that number. But then why is the Greek problem the one grabbing the headlines? And what might it have to do with you?
The situation in Greece seems to be so poignant precisely because Greece is not the most egregious debtor nation in Europe or – more to the point – the Euro Zone. Its debt could be internally manageable if Greece (a) increased its GDP (b) raised tax revenues (c) cut spending (d) devalued its currency to allow quicker paydown of the debt. Unfortunately for them, option (d) is off the table. Options (b) and (c) are never popular in any democratically elected political system (as evidenced by the rioting) and option (a) is not likely to occur soon (as evidenced by the rioting).
Thus, whether fair or not, Greece is being seen as the test case for a Euro-zone that hosts 10 of the top 20 indebted industrialized nations. If the rich countries of the EU must bail out Greece, then other, deeper-in-debt, countries are surely going to come calling, no? Certainly the world’s financial markets believe the possibility of just such a scenario:
“I think we will continue to have more bad news from Europe, after Greece then Portugal then Spain. I think it’s like a domino effect, the house of cards is falling apart, and it will bring down the global financial markets too,” says Francis Lun, General Manager of Fulbright Securities Ltd.
Portugal is already attracting speculative attention, with pressure mounting on the market there, and its debt being downgraded, although not yet to Greece’s junk status. With Spain also teetering on the edge the fears are EU members will seek to restructure their debts, and it is that that is driving the market sentiment, a snowball that needs only the tiniest of pushes to send prices careering down. (from Euronews.net)
Megan McArdle of TheAtlantic.com believes withdrawal from the Monetary Union is really the only way to save Greece and save the Union. Devaluation of a Greek-only currency will help the Greeks sort out their books without breaking the wills of the larger EU economies (read: France and Germany).
As for you and me in the good old US of A, remember that we are 20th on that list, albeit the only one on the list with a debt-to-GDP ratio below 100% (albeit just barely). We have even run up higher debts (around 125% immediately after World War II). But we have a diverse and large enough economy and an international market (and language) that could help us grow our GDP out of the hole. Perhaps more importantly still (and one that might save the likes of Ireland and France, farther up the debtor list than Greece) is our long tradition of political stability.
A fly in this ointment, though, is that the one financial house that was allowed to survive the meltdown of 2008 was Goldman Sachs. And the financial house that both financed Greece’s debt and bet that Greece could not pay it back was Goldman Sachs. If Greece defaults and Goldman Sachs can not get its investments back, then Goldman’s efforts to recoup its losses might send more shivers through our credit and financial markets, which could stifle economic growth. Again.