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Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

How Greece Debt Crisis Can Impact YOU!

Economics / Global Debt Crisis Apr 17, 2010 - 01:42 PM GMT

By: Bryan_Rich

Economics

Best Financial Markets Analysis ArticleThe economic problems in Greece have made front page news for the better part of the past three months. And I’ve written several columns here in Money and Markets on the ongoing drama and its influence on the global currency markets.

But with all of this incessant talk about Greece, what does it have to do with you?


That’s a common question. And the answer: Potentially, a lot.

You see, Greece represents the growing mound of looming landmines in a global economy that has been damaged by the worst economic crisis in more than 80 years. And if there’s anything that should have been clear from the collapse in global financial markets in 2008, it’s that the world is a highly interconnected place, and so are its financial markets. So problems in Greece will likely mean problems for you and me.

Here’s why …

In a fragile economic recovery, investor and consumer confidence plays an important role in repairing economies … and likewise, restoring investment values and opportunities.

So a hiccup in investor optimism can be a huge blow to a fragile economy. It can make businesses more defensive and consumers stingier, thus sending stock prices lower and risk premiums higher.

In short, a lack of participant confidence can mean round two of a bear market in global stocks, and potentially a double dip recession for the global economy. And that’s highly possible because …

A Sovereign Debt Crisis Is Underway

ECB Executive Board member Juergen Stark said this week that the global economy may be entering a new “sovereign debt crisis.”

Respectfully, he’s a bit late in admitting that.

Last November, Dubai sent tremors through financial markets by announcing it would be “restructuring” its debt. The government later offered its bondholders just 60 cents on the dollar for their investment.

Now, Greece’s shaky finances represent a threat to the lifespan of the euro, the second most widely held currency in the world. And it stands on wobbly footing as the second domino in an unraveling global sovereign debt crisis. The other potential candidates include Portugal, Italy, Ireland, Spain … even the UK, Japan and the U.S.

That’s a lineup of suspects that, if under the gun of global investor scrutiny for their respective burgeoning debt problems, could mean a lot to you and me — and to the outlook of the global economy.

But the euro zone and the IMF stepped up last weekend and provided details of aggressive financial aid as a lifeline to Greece. And given the initial bounce in the euro and decline in market interest rates for Greek government debt, the hope was that Greece’s default threat had finally been put to bed.

Not so. In fact …

The Greece Problem Is Far from Over

Those initial favorable responses to the aid plan are already being reversed as Greece’s bond yields and the euro are back to pre-rescue announcement levels.

The 16 euro members must unanimously agree to give Greece the funds.
The 16 euro members must unanimously agree to give Greece the funds.

For the near term, the rescue plan could plug the gap for Greece. It has 11.6 billion euros of government debt to refinance over the next month — and another 20 billion euros by the end of the year.

And funding from its fellow euro-zone countries could allow Greece to roll-over that debt, without having to pay the prohibitively high interest rate that global investors would require from such a high-risk borrower.

However, accessing those funds is no slam dunk. All sixteen member countries would have to agree to disburse the funds, and only if they deemed Greece unable to raise funds on its own.

Perhaps even more troubling, though, is if the euro lifeline gets extended, that opens up a can of worms. Because it means the euro-zone officials have breached the treaty guidelines upon which the euro was developed.

And it will also likely mean that Portugal, Spain, Italy and Ireland will be next in line for a handout — a recipe for a political and economic disaster in Europe and a potential break-up of the euro.

From there … the other debt-burdened dominos in line could become even more vulnerable.

Greece … a Big Deal

As the crisis in Greece continues to unfold, investors will look for safety.
As the crisis in Greece continues to unfold, investors will look for safety.

With the U.S. stock market climbing, almost daily, to new post-crisis highs and the U.S. economic data showing solid recovery, Greece sounds like a distant problem.

But as you can see, the drama in Greece is a big deal! Not just for Europe, but for the world economy — and for institutional and individual investors alike.

Unfortunately, the euro zone is in a no-win situation. The European monetary union countries, with damaged balance sheets and a bleak outlook for growth, are stuck. And with a one-size fits all monetary policy and currency, they lack critical tools, such as devaluation, to work their way out.

So expect the sovereign debt crisis to continue to build. And be cautious of a quick downturn in global risk appetite, which can send stock markets and global demand heading south, and global capital heading for safety.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


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