Why Greece Matters

10/19/2011 7:30 am EST

Focus: GLOBAL

Mary Anne & Pamela Aden

Co-Editors, The Aden Forecast

It’s far away and a small country, so what does it matter? A fair bit, write Mary Anne and Pamela Aden of The Aden Forecast.

As you know, Greece has been touch and go since last year, and it has strongly affected most of the markets in one way or another.

Currently, Greece has the potential to trigger the next subprime-type global crisis. The world’s leading central banks certainly know this, and that’s why they’ve been taking action to plug the dike before it bursts.

Why? They recognize the global domino effect, and what the repercussions would be if Greece were to default on its debt.

Since Greece is a member of the Eurozone, not only would it hurt the stronger Euro countries—who’ve been lending Greece most of the money they’ve needed—but it would destroy confidence in the entire Euro community.

It would also hurt the big banks in Germany and France who have been Greece’s biggest creditors. They’ve lent billions to Greece, buying 70% of their bonds. They’ve also lent a great deal of money to several of the other weaker and on-the-fence Euro countries, like Portugal, Ireland, Spain, and Italy.

So if Greece defaults on its loans, fears would then spread about the ability of these other countries to repay their debts. And since Italy and Spain are among the largest Euro economies, this would become a huge deal.

Demonstrations are already underway due to budget cuts and austerity measures. For now, these countries are essentially following Greece in some ways...slowly becoming wild cards, especially with the global economy slowing.

The banks would be facing huge losses, but there’s more. Many of these loans are insured by US institutions, so the US would be affected too. The rest of the world would be close behind...markets would obviously panic as investors run for cover, seeking safe havens.

This is already happening to some extent, as we saw with the falling global stock markets and raw materials in September. Meanwhile, the yen, US bonds, and the US dollar have emerged as the safe havens of choice.

Germany has been on the front lines, calling on Euro members to take action and asking for help. That’s why, for the first time since 2008, the US, Japan, UK, and Swiss central banks offered loans to help ease the crisis.

The chances of Greece defaulting had by then soared to 98%. But not even two weeks later, German Chancellor Merkel urgently needed more money for their emergency fund to build a firewall around Greece and the weaker Euro countries. And then the ECB added more liquidity to help the banks.

The billions spent so far haven’t been enough, and now they’ve boosted that up to far higher levels. Will this work? Will it be enough? At this point, the verdict is still out, and uncertainty persists.

Remember, the markets look ahead, and there’s a fear hanging over them. Aside from Greece, the biggest concern is the weakening global economy. It has not rebounded following the 2008 crisis, like it did in previous recessions. That’s the case in most of the major countries where unemployment remains stubbornly high.

Sure, many of the emerging countries have enjoyed strong growth and booming times, but now they’re slowing down too. World stock markets are bearish, and overall, things simply aren’t looking good.

From this vantage point, another panic and financial crisis would hit harder than it did in 2008, and that’s what the central bankers are afraid of...

That’s why Greece matters, but so does everything else. It’s also why the markets have been so volatile. Again, we’re likely at one of those key turning points. Each market is reacting, but they’re different.

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