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Since the first of the year, fears that Greece may default on its government
debt have kept global markets on edge. How is it that the economic problems of a small country the size of Ohio can hurt financial
markets across the globe?
The problems in Greece are symptomatic of the lingering global credit crisis. While there have been significant improvements
in the global financial system since the dark days of a year ago, the fragile process of deleveraging in banks and countries
continues.
Greece is one of the 16 nations that use the euro as a currency within a 27-country bloc that forms the European Union, and
it represents only 2.7 percent of the euro region economy. However, Greece has a government debt load of 113 percent of gross
domestic product and a 2009 budget deficit of 12.7 percent of GDP—four times higher than the 3-percent limit allowed
by the EU. As the prospect of default has risen, interest rates on Greek debt have soared to 4 percent over German bunds.
The scenario is complicated by the fact that the euro is a shared currency. To prevent default of Greece’s sovereign
debt, the other countries who share the euro as a common currency may need to bail the country out. The pressure to devise
a plan falls primarily to Germany, which has the deepest pockets in the EU.
As one might suspect, the ordeal is causing socio-political problems as citizens of the stronger EU countries are loath to
bail out their debt-ridden neighbors. So far, Germany has resorted to berating Greece toward undertaking fiscal-austerity
programs to reduce its budget deficit, but has not publicly said it would bail the country out.
The much larger fear, and likely why global markets are fidgeting, is that a default in Greece could lead to a contagion
in other debt-laden European countries. The so-called PIIGS countries (Portugal, Italy, Ireland, Greece and Spain) are all
wrestling with excessive sovereign debt amid ailing economic conditions.
Reminiscent of the U.S. crisis, there is much debate among politicians and financial minds as to the wisdom of bailouts.
On the one hand is the concern that a bailout will create a moral hazard, whereby distressed EU countries fail to take the
strong measures needed, knowing the stronger countries will come to their rescue.
Yet, most observers conclude that Germany and the EU will have no choice but to bail out Greece. Few politicians would want
to see how global markets react to a Greek default, particularly with the Lehman Brothers episode fresh in their minds.
In the latest development of this crisis (and perhaps of little surprise to anyone), Wall Street investment bankers apparently
helped engineer Greece’s debt problem. No, they did not sell 2,000-year subprime mortgages on the Acropolis, but they
did arrange complex currency swap derivatives that allowed Greece to mask the true size of its debt to the rest of the world.
Finally, some even say Greece is the canary in the coal mine for what’s coming down the road for the United States.
Regardless, if investors haven’t been paying attention to this theater half a world away, it’s worth watching
how this Greek tragedy plays out on the global stage.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears
every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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