Finance, Fuel Prices, Economics, Markets

Why Tiny Greece Matters

Its true that the debt problems of the tiny Greek economy seems all out of proportion to the fears it has struck in the world markets. Friday saw a lot of people trying to downplay it, noting that the economies of Greece and Portugal are only 2% and 1% of EU GDP respectively. Even Jim Puplava was making that argument yesterday. But the shockwaves sent by the Dubai default, which was even smaller, are establishing a pattern here.

The size of the economies involved is not the issue. What lies behind it is the Domino Theory that involves the interconnectedness of a handful of world megabanks that not only hold those loans, but also have issued most of the CDS insurance on those bonds, as well as interest rate swaps such as JPMs over $70 trillion worth of interest rate derivatives.

Governments around the world with the US in the lead, are making the same many of the mistakes made during the Great Depression. To wit, raising taxes on a sinking economy while grossly manipulating markets. Sinking back into recession means declining tax revenues are very likely to push marginal nations such as the PIIGS over the edge and into default. European banks made most of those loans and hold the bonds. US banks insure them, along with interest rates. The raising of taxes almost guarantees that the world economy will slide back into recession (assuming one believes that we ever got out, which most don’t).

If this isn’t a perfect set up for a domino chain reaction of crisis, I don’t know what is. And add to all this the fact the insolvency not only of the mega banks, but now national governments, has been papered over. Not only has virtually none of the structural problems that caused the present state of affairs been repaired, these problems have been made far worse. This fact has been thoroughly revealed, discussed and ignored over the last two years.

The contagion in southern Europe poses a severe risk of an all-out financial plague breaking out. It threatens not only the Euro but the entire EU itself. Most bets are on the probability that the EU will have no choice but to bail out Greece and Portugal, which will only incite the remaining and larger PIIGS to come a-begging to the ECB. So, where does it stop? Were not talking about bailing out mere banks here but a half dozen nations, which could easily wreck the Euro and lead to an even greater currency crisis as the world’s second largest currency.

So what we have here is tiny Greece being akin to the assassination of Archduke Ferdinand (who?) starting WWI when nobody even knew who the hell he was. The proverbial straw that breaks the camel’s back. And yet world banks and economies are so fragile that the current situation can be likened to a hemophiliac walking through a briar patch desperately try to avoid being scratched and bleeding to death. The probability of not getting scratched while picking blackberries is pretty slim.


February 6, 2010 Posted by | Economics | Leave a comment