When looking at world, GDP Greece is ranked 39th, roughly .50% of World GDP. The logical question is: why is Greece having such an impact on our domestic market? Here are some reasons off the top of my head:
- Uncertainty – It seems nobody is sure how Greece restructuring or a bailout will work. The longer it takes to find an actual solution (as opposed to kicking the can down the road) the more uncertainty for global markets and the more default issues will keep creeping up.
- Contagion:
- Debt: If Greece defaults does that create a run (i.e. institutions no longer will roll over purchases of short-term debt) on Ireland, Portugal, Spain, etc., and thus lead to their subsequent default?
- Unrest: There has already been rioting in Greece. Social unrest spreading through Europe would have economic consequences.
- Financial Markets: A default in Greece has vast ripples all over the financial system making a small country paramount in how capital flows.
It is contagion that I want to focus on. There has already been talk of a U.S. bailout of Greece. This is mostly likely because U.S. officials fear contagion spreading into the financial markets. Think about what happened with AIG after Lehman (although now it would appear banks are in a better capital position).
In my next post I will delve into the particulars of why contagion, especially in the financial markets, could be extremely harmful.
