How The Greek Debt Crisis Impacts The Global Economy

by The Smarter Wallet on June 28, 2010

When it comes to financial crises, few can argue against the fact that the recession the U.S. has been experiencing over the past several years is one of the worst on record. What’s worse is that in today’s society, the chaos theory applies. The chaos theory is the one that says that a butterfly flapping its wings in Africa will cause a tornado in Kansas. It looks like our financial meltdown has had a pretty significant impact on Europe, with Greece taking the brunt of it.

In what looks like a mirror image of what happened here in the U.S. two years ago, seven big banks are on the brink of failure including:

  • Fortis
  • Dexia
  • Société Générale
  • BNP Paribas
  • ING
  • Barclays
  • Deutsche Bank

It didn’t hurt that each of these big financial institutions had their hands in more than a few unscrupulous AIG/Lehman backed mortgage securities. (Did the A-Ha moment just happen for you?) All told, these organizations hold about $35 billion of Greek bonds. It’s easy to see just how devastating it’s going to be for Greece — a small, yet distinguished country — if these banks fail.


But what does all this mean for us? Well, remember when our economy began to tank and the banks were no longer willing to loan money to each other? It was the worst credit freeze ever recorded…at least up until that moment. Our economy practically stopped. Not only were our own banks unwilling to issue loans to each other for fear of loss, foreign banks were also reserved, limiting any loans extended at all, to a repayment period of days.

How The Greek Debt Crisis Impacts The Global Economy

The same phenomenon is being felt in Europe. The main driver for the current economic crisis is this: while our economy continues to recover from the U.S. financial crisis, thanks to the help of government bailout funds, many of the multinational banks are facing the possibility that the Greek bonds they hold are going to become worthless in the coming months. The failure of Greece, and the possibility that Spain could follow, is not something that any of these banks are equipped to handle, since the share of Greek debt held by each bank makes up something like 40% or so of their assets. This effect is increased exponentially if Spain follows suit.

And not only are these banks not willing to lend to each other, they are no longer able to lend to U.S. banks and contribute to our recovery. This means that once again, we are faced with a credit crunch on an already overtaxed financial system. Our banks, because of the lack of international funding, will once again be in jeopardy; this may happen because their core business process for earning revenue is by lending. And this will threaten to push the already weakened economy back into the recesses of recession.

But what about Spain?

The bigger concern at this point is the stability of Spain. The reason is two-fold. One, the debt of Spain is more than double that of the debt of Greece. Plus, a bunch of Spanish debt, about 45% of it, is held by foreign countries. When this debt becomes worthless…well, you get the picture.

It’s an unfortunate side effect of a globalized economy. No longer are countries functioning individually, but rather as individual pieces of the worldwide puzzle. The puzzle’s success as a whole depends on each piece doing its part to fill the gaps. When one piece is missing, the rest of the puzzle no longer works.

And so, we sit and we watch the financial crisis unfold in Europe, much as they did during ours, holding our collective breaths that the events we fear the most will not unfold and undo what forward progress we’ve been able to make in 2010. That the debt in Greece will not unleash the perfect storm and destroy the global financial system.

Just like the butterfly in Africa.

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