View Full Version : Why is a small country like Greece dragging world markets down with itself ?

13-09-11, 08:59
Something is wrong. We are on the brink of Europe's 3rd biggest financial crisis in 100 years, the second in 3 years, and all this because of the government debt of a country that makes up 2% of the European population (barely 0.2% of the world's citizens) and a tiny fraction of the global economy : Greece. There are talks of the euro falling apart soon, as if it was utterly unimaginable that the single currency survive without Greece as a member. It's not making much sense. Why is Greece so inescapable ?

Stocks of quite a few major European banks (BNP-Paribas, Société Générale, ING, Commerzbank, Intesa Sanpaolo) dropped by roughly 10% yesterday alone, and few banks are now worth more than they did in the aftermath of the 2008 credit crunch. All this because investors are afraid that banks will not recover what the money they lend to the Greek state or invested in Greek companies. But how much can it be worth in absolute value, as a share of all their loans and investments globally ? Were it only one or two banks who had invested massively in Greece, I would understand, but we are talking about all European banks, and even American ones.

In 2008, it was the subprimes from the US real estate market, a truly huge amount of money involving fraudulent or misguided investments from banks all over the developed world. The culprit was the US market, the world's biggest, the power behind global finance. A global financial crisis was inevitable. But what about bantam Greece ? The Hellenic Republic is not hauling the world economy in normal, healthy economic times, yet strangely it seems to be now. If the US state of Indiana (closest equivalent to Greece in terms of GDP) went bankrupt, you wouldn't expect the whole US economy to go bust and the US dollar exploding in 50 currencies. That would be completely surrealistic. Is it any less surrealistic with Greece in Europe ?

Why can't Greece just leave the Eurozone and write off some of its bad debt, so that we can all put all of this behind us ? If I am missing something please let me know.

13-09-11, 09:30
You're not missing anything. What you said should have been done some time ago for the good of Greece and EuroZone.
I think the political and financial circles are afraid that secession or bankruptcy of Greece will set a precedence that will be fallowed by Italy, Spain, Portugal and possibly Ireland. That would encompass about 130 million people, with their debts. And this is what is really scary. Small Greece can start big avalanche.
I'm not convinced that lending more money to Greece will work for any of the involved parties. The debt is just pilling higher and higher. The longer this is going on the harder will be the fall I'm afraid.

13-09-11, 11:28
What they need to do is take punitive steps for bailed-out EU states that do not strictly follow EU and IMF recovery plans. In extreme cases (and I think the situation has become extreme), faulty EU states should even be made to surrender part of their sovereignty (e.g. Finance Ministry) to EU management. The fear of losing sovereignty over one's own country, and the shame of it, should motivate the laggard nations to make the necessary reforms. At this point I feel that there is no other alternative for near-bankrupt EU states :

1) make the necessary reforms yourself
2) surrender your finances to the EU
3) leave the EU

At the moment they are saying that they want the first choice, but not actually doing it. The EU must confront them with choice #2 or #3 and be firm.

13-09-11, 12:34
Blame the French and Germans for allowing some of these nations to enter. Prodi the first president fought hard against what the French and Germans wanted, but he lost out.

Also, the initial euro concept was for nations to keep their own currencies and the euro currency was intended to be only a commerce currency. Again refused. But in 2008 , people wanted to create the Euro2 currency for that same purpose...........too late.

Every person knew Greece could not repay it debt .............everyone except the leaders of euro nations.

As one German newspaper stated recently, when Italy brings down the euro, every German should send every italian a medal.

13-09-11, 12:36
Greece is not a liquidity problem it's a solvency problem. Greece is experiencing a double recession due to reforms that restrict public spending and curb foreign investment. If the Eurozone turns on Greece market sentiment will be positive for a while but the Eurozone will find it increasingly difficult to sustain the inflated public sectors of Italy and Spain. Greece is a test case not the culprit. Europe's socialist system is about to get shaken and many are afraid of conservative sentiment grabbing hold of Europe.

European governments at the commencement of Greece's crisis were overwhelmingly center-right or social democratic. The deep reforms necessary within Europe are inherently center right policies placing Europe's socialist governments in a quandary.

13-09-11, 12:49
Greece is of course not the only country at stake here. Portugal especially doesn't seem in great shape. I am confident that Italy and Spain can withstand this crisis though. Ireland was the first country to be bailed out and reforms are under way. We don't hear much about the Irish anymore.

I think that the common complaint about Greece now is that the legislative reforms and the privatisation of the public sector aren't being implemented fast enough. What is irritating EU leaders, and the Germans in particular, is not that there is no solution to the problem but that the Greek authorities are not speeding things up as they should to shorten the crisis and limit the damages.

One of the most natural solutions to the current conundrum would be for individual member states to cede their fiscal sovereignty to a centralised EU authority. The total public debt of EU member states is much lower in percentage of GDP than what the US faces now. The problem is that the EU lacks the power to fix this mess without a proper fiscal union. That's why I was suggesting above (option #2) that countries should surrender some of their sovereignty to the EU. However all EU member states will have to do it, not just those in trouble now. Such a system only works if all countries are in together.

13-09-11, 13:20
You're not missing anything. What you said should have been done some time ago for the good of Greece and EuroZone.

Yup, it would be good for both parties, but the unkown factor of a member state leaving the eurozone in this financial crisis is the deterant for them to not follow this solution, because what's stopping other members from following suite? Furthermore, alot of other european banks will lose alot of money that the governments will have to pay for.

13-09-11, 13:42
One of the most natural solutions to the current conundrum would be for individual member states to cede their fiscal sovereignty to a centralised EU authority.

This in theory has already been implemented. The problem is Greek citizens when asked to choose between more austerity measures and economic meltdown or Eurozone exit, choose to fight against the austerity measures because it is something they have a measure of control over. Government is caught in the middle and is experiencing the troika as partly responsible for Greece's deepening economic and political crisis. For Greeks to band together there needs to be a clear and concise plan. Austerity measures are not a plan for long term resolution and your average Greek citizen wants a guarantee that his money will be used for more than just paying off foreign lenders.

If more than a third of all money paid to lenders was invested back into the Greek Industrial Sector then my opinion is Greeks would think it over and start to play along.