Thursday, June 30, 2011

Why should we care about Greece?

The Greeks have a saying, I kali mera apo to proi fenete, which means: “You can tell a good day is coming by its morning.” Unfortunately, Greece is in the midst of a long stretch of hangover mornings. The Mediterranean nation staved off bankruptcy when lawmakers recently passed austerity measures that aim to cut spending, raise taxes by $40 billion and raise $71 billion in privatizations over five years.

So why should we care?

The known answer is that a Greek default could trigger a banking crisis similar to when AIG collapsed three years ago. The unknown answer depends on an unknown question: How deeply involved is the United States?

Andreas Rauterkus, Ph.D., a banking expert with the UAB School of Business, says “US banks and the Federal Reserve were suspiciously quiet when asked about the exposure of U.S. financial institutions. Some guess it could be anywhere between $5 billion and $80 billion. Talk on Wall Street indicates that U.S. financial institutions might be holding a large number of Credit Default Swaps that would have to be paid in case of a default, effectively creating a second AIG situation."

A second big question: Should Greece leave the Euro?

Rauterkus says that would have the same effect of defaulting on their loans, except the long-term implications would be more severe. Leaving the Euro would put the country on a financial island. “It would completely isolate Greece economically and would make things even worse. Their new currency would most likely be non-convertible (i.e. nobody wants to buy or sell it), which makes it impossible for Greece to borrow in the international market and has major negative implications on Greece’s ability to engage in international trade.”

Rauterkus goes on to say this is a long process and Greece is “too big to fail,” so the EU and the IMF will do whatever it takes to avert bankruptcy as long as Greece is willing to cooperate as they did by passing the austerity bill.

A good day in Greece is sure to come. It just won’t be tomorrow. Or the day after tomorrow.

1 comment:

International Guy said...

I am sick of the "too big to fail" mantra. It is repeated endlessly because powerful and wealthy interests want governments to endlessly bail them out for their own bad decision, and to do so with taxpayer money. How convenient.