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June 22, 2011 at 02:24 PM
If you have not been following the ongoing financial crisis in Greece, then you probably should. In a nutshell, what you’ve got is Greece’s runaway spending has put the country on course to default on its sovereign debt. It is not hard to see how this all developed, really, as Greece has some 800,000 people on government employ and no legal means of reducing it, as these jobs are constitutionally protected. Meanwhile, the larger business culture of the country has allowed for people like hairdressers to retire on a full pension in their 50s, in part because their work exposes them to what the Greeks consider to be harmful chemicals. I’m not kidding.
As part of the Eurozone, Greece can’t devalue its currency as Ecuador did back in the 90s when it nearly defaulted. So instead the country must pass deep and painful austerity cuts across the board if it is to have any chance of receiving the bucketloads of additional financial aid it needs from countries such as Germany to keep going. These cuts are what has currently embroiled the country in a nonstop wave of pretty nasty protests from government workers, students, pretty much anybody in the country. But the truth is this: Greece has to make these cuts, and even when it does, it still doesn’t look like it will be enough to prevent a default, which means that the country will have to get an extension on its sovereign debt payment, and even that is not assured.
Why does this matter to us? Greece, after all, accounts for only 2% of the Eurozone economy, so its default doesn’t seem like such a big thing, except that it raises the dreaded word of contagion. What contagion really is is the fer that once Greece defaults, not only will investors stop dropping money into it, but they will stop investing in, and may want to collect on outstanding debts on, other troubled economies in the Eurozone, namely Spain, Ireland and Belgium. Spain keeps coming up as the big concern, as its economy is much larger than Greece’s, and frankly, there is not enough money in the system to bail it out wholesale.
What powers the notion of contagion is that nobody really knows how much toxic sovereign debt is out there in the system, thanks largely to the manner in which debts of all kinds have been homogenized into a sort of financial slurry in recent years. It is not that if Greece defaults then Spain surely will…it is the fear that nobody really knows, and won’t know until it is too late. That kind of uncertainty gives the financial world many gray hairs, which is why Greece means so much right now. Financially, it strikes me as being like Archduke Franz Ferdinand – nobody thought knocking off a minor political figure would start the Great War, until it did. But in a world that watched AIG begin a global financial meltdown, memories have not gotten so short that people can look at Greece and not extrapolate some very scary worst case scenarios.
