September 12, 2011
Source: ECBlog - MIchael Snyder
Are we on the verge of a massive financial collapse in Europe? Rumors of an imminent default by Greece are flying around all over the place and Greek government officials are openly admitting that they are running out of money. Without more bailout funds it is absolutely certain that Greece will soon default on their debts. But German officials are threatening to hold up more bailout payments until the Greeks "do what they agreed to do". The attitude in Germany is that the Greeks must now pay the price for going into so much debt. Officials in the Greek government are becoming frustrated because the more austerity measures they implement, the more their economy shrinks. As the economy shrinks, so do tax payments and the budget deficit gets even larger. Meanwhile, hordes of very angry Greek citizens are violently protesting in the streets. If Germany allows Greece to default, that is going to start financial dominoes tumbling around the globe and it is going to be a signal to the financial markets that there is a very real possibility that Portugal, Italy and Spain will be allowed to default as well. Needless to say, all hell would break loose at that point.
So why is Greece so important?
Well, there are two reasons why Greece is so important.
Number one, major banks all over Europe are heavily invested in Greek debt. Since many of those banks are also very highly leveraged, if they are forced to take huge losses on Greek debt it could wipe many of them out.
Secondly, if Greece defaults, it tells the markets that Portugal, Italy and Spain would likely not be rescued either. It would suddenly become much, much more expensive for those countries to borrow money, which would make their already huge debt problems far worse.
If Italy or Spain were to go down, it would wipe out major banks all over the globe.
Recently, Paul Krugman of the New York Times summarized the scale of the problem the world financial system is now facing....
No comments:
Post a Comment