Greek Tragedy Could Ignite Great Debt Crisis

Jeffrey Garten The Daily Beast February 10, 2010

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Richard Drew / AP Photo Athens’ money mess has already triggered one spasm in the global markets. Jeffrey E. Garten on how this week could be worse—and set off a long-overdue confrontation over the West’s public debt.

On Wednesday, large-scale crowds are expected to gather in Greece to rail against upcoming austerity measures. And on Thursday, a "crisis summit" of the European heads of state will convene to agonize over the possibility of a Greek debt default-which, should it come to pass, would mark the first time a member of the European Union and a user of the euro snubbed its creditors. The New York Times, The Wall Street Journal, the Financial Times, and others have all devoted enormous coverage to the drama across the Atlantic. But Greece represents only about 2% of the European Union's GDP, so why all the fuss? And should we on this side of the ocean be worried?

Greece may be an outlier, in statistical terms, but no one should be fooled into thinking that the agonizing struggles it faces are not coming our way.

Picture someone who has experienced a severe heart attack. He underwent extensive surgery, then entered intensive care. The doctors were cautiously optimistic about a slow recuperation, but then new problems began to appear not in the heart but in one of the patient's limbs. The physicians wondered, with great anxiety, whether this new complication could spread and set back the recovery, because these were the same specialists who themselves were humbled by the original traumatic event, which they failed to anticipate and totally underestimated. Now they were taking nothing for granted.

Think of the patient as the world financial system and the new complication as Greece, a small country, far from any great financial center, that is now in the global spotlight because of severe financial stresses stemming from massive deficits and rising debt. The doctors are central bankers and finance ministers. The big questions: how big are Greece's problems, are they contagious, and how great could the damage be?

Greece has been living way beyond its means and now needs to borrow approximately $50 billion in the next few months or default on its government-issued bonds. In order for investors to buy these bonds, they will need evidence that the Greek government can tighten its belt beyond anything its parliament has been willing to do so far—demanding that Athens reduce its deficits from about 12% of GDP to closer to 3% over the next few years, the equivalent of Washington’s paring its $1.6 trillion deficit to $400 billion. Even then, these lenders will demand an extraordinarily high interest rate to compensate them for the risk they will be taking that serious austerity will not be sustained. Alternatively, if the private markets don't come to its aid, Greece may receive a bailout from the European Union or the International Monetary Fund. But even that would come with severe belt-tightening conditions-and would follow a period of highly public and even confrontational negotiations, during which the markets for Greek securities will have deteriorated.

Either way, there are a number of reasons that the turmoil created by the Greek problem could spread throughout the global financial system.

Banks and other lenders are worried that the Greek situation could spread to other financially weak countries in the EU, namely Portugal and Spain; but some even talk of Austria and Belgium, where debts are also sky high. Bankers' anxieties would mean steeper borrowing costs for several of these countries. Higher interest rates could spread throughout the euro zone, constricting consumer demand, industrial investment, and the European recovery. Slower growth in the European Union, an area that accounts for some 30% of the global economy, would hurt recovery in the U.S., because it would reduce our trade and investment.

Since all these countries are part of the euro zone, investor confidence in the euro could quickly erode, as was happening last week. Euros would be exchanged for dollars, and the new demand for the greenbacks would cause its value to rise. A stronger dollar would damage us by making American job-creating exports more expensive in global markets. Only last week, President Obama announced a massive export push with the goal of doubling American sales abroad in five years and creating or saving some two million jobs.

View as Single Page 12 Back to Top February 9, 2010 | 3:38pm Facebook | Twitter | Digg | Share | Emails | print var OutbrainPermaLink=document.location.href.replace(document.location.search, '').replace(/\/\d+\/$/,'/').replace(document.location.host, 'thedailybeast.com'); var OB_Template = "The Daily Beast"; var OB_demoMode = false; var OBITm = "1255455386150"; var OB_langJS ='http://widgets.outbrain.com/lang_en.js'; if ( typeof(OB_Script)!='undefined' ) OutbrainStart(); else { var OB_Script = true; var str = ''; document.write(str); } Default, Greece, Euro, Debt, Economy, Thai Baht, Gdp, European Union, Financial Times, Asian Markets, Wall Street Journal, New York Times (–) Show Replies Collapse Replies Sort Up Sort Down sort by date: SensiStar

Ohhhhhh Noooooo. The Bush Recession will not end.

Flag It | Permalink | Reply | (–) Show Replies Collapse Replies 8:51 pm, Feb 9, 2010 RevPettibone

to SensiStar... How foolish a comment, obviously made by a person of little knowledge... Hellenic insolvency has nothing to do with Bush. Greece was bound to go belly-up long ago as a result of the ever increasing costs of their social programs compounded by the insurmountable debt they were faced with after the 2004 Olympics.

Flag It | Permalink | Reply 7:23 am, Feb 10, 2010 DakLak

This demonstrates how a relatively small country, best known as a sunny playground for Europe along with delicious olives, grapes and feta cheese can upset the financial applecart. To join the EU zone countries had to reach certain financial bench marks. It is common knowledge that several countries 'financials' had to be stretched in order to join, amongst them Greece. Others are numbered amongst the PIGS definition. The Greek debt is but a drop in the bucket when compared to the US debt but the warnings are there to be read.

Flag It | Permalink | Reply 8:03 am, Feb 10, 2010 $('#c_total span').html('3'); $('#c_total').show(); Share this comment on Facebook

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Greek Tragedy Could Ignite Great Debt Crisis

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