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Greek Financial Collapse

Despite two years of constant and often extreme measures a Greek financial collapse is still possible. German and French leaders, according to press reports, are pressuring Greek leaders as well as private lenders to move forward with necessary measures. These include further write offs by private lenders and solidifying austerity measures by the Greeks. One might wonder why all the fuss about a possible Greek financial collapse. Nations have had to write off debt and revalue their currencies before. The problem here is that the Greek debt issue is tied up with the future of the European Union, the second largest economy in the world. A Greek financial collapse could lead to a breakup of the European Union and financial repercussions across the globe. For the investor this is not just about investing in Euro Zone stocks , bonds or the Euro. It has to do with whether the world pulls itself out of the worst recession in three quarters of a century or falls back into a decade of global depression.

EU leaders are cautioning Greece that it will not continue to get help with its sovereign debt burden unless it agrees with a bond swap with creditor banks. The European Central Bank and International Monetary Fund are not going to shoulder all of the burden and effectively bail out Greece and the unwise investors in its bonds. An unfortunate aspect of this scenario is that the leader of France, Sarkozy, is running for reelection in May of this year. Thus he is fighting two battles at once, dealing with the most serious issue to face the EU in years and trying to keep voters at home happy at the same time. Voters in France and elsewhere on the continent could decide that enough is enough in regard to bailing out any of the southern tier EU nations that are all dealing with excessive debt. If this comes to pass a Greek financial collapse and breakup of the EU could sadly happen. At that time investors might well consider how best to profit from a stock selloff in European markets as well as a decline of the Euro.

To a degree the negotiations between lenders, the Greek government, the IMF, the European Central Bank, and EU leaders resembles a gigantic game of “chicken” with everyone’s car speeding toward a central point, all expecting the others to swerve aside at the last moment. To the degree that voters in Germany, France, and other EU nations view the Greek presence in the EU as optional, these voters could force their leaders to stay a fiscally sound course. The dangerous aspect of all this is that a Greek financial collapse could, in fact, lead to problems in Italy, Spain, Portugal and Ireland. The bankruptcy of several EU nations could lead to a tightening of credit markets worldwide. This is the worst case scenario that leaders fear. The EU has, in fact, tightened up financial integration across its core 17 members that use the Euro as currency. It has increased European Central Bank power as well. While negotiations on Greek debt continue the EU is clarifying issues relating to tighter fiscal integration among members and the European Central Bank has recently issued two thirds a trillion dollars in loans to banks across the continent in order to stabilize the banking system.

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