The main problem of a Greek exit from the euro zone is not necessarily the direct impact on banks. I believe our government when they say that they would be able to get that under control. The real problem is the next domino. The crisis will spread unchecked to Italy. If Greece leaves the euro zone, then owners of Greek bonds will lose their entire investment. At best, the Greeks would pay them back a small part of their investment — in almost worthless drachmas.
So what kind of investor in his or her right mind would purchase Portuguese, Spanish or Italian sovereign bonds in this kind of situation? Not even a yield of 7 percent can make up for all the risk that Italy won’t be able to pay back its debt. As things now stand, Italy’s debt accounts for 120 percent of its annual GDP, growth is close to zero and the country is currently slipping into a deep recession. In fact, it’s a matter of mathematical inevitability that Italy won’t be able to service its loans if interest rates on its sovereign debt don’t fall. Granted, there have to be reforms. But reforms don’t resolve an acute debt crisis. We’ve already learned that lesson from other crises.
via Debt Crisis Contagion: The Euro Zone’s Deadly Domino Effect – SPIEGEL ONLINE – News – International.
There is clearly something wrong with the system when a tiny country like Greece can have such a huge effect on the global economy. The damage it can do is absurdly disproportionate with the size of its economy. The global economy receives an imperceptible benefit when Greece is doing well but can be driven into a global crisis when things are going bad. It doesn’t make any sense.
It is not just Greece. Most European countries are carrying too much debt — that is why there is danger of the domino effect.
The issue is that bond holders have been protected for to long. The reason that a lot of this soverign debt exists is that the investment of a bond seem to be protected where other investments are not.
If you loan money or invest in a company/country that goes broke then you Should Lose… hence then you are more careful when investing next time. You dont keep blindly investing more and more in a sinking ship. This brings the countries issues to hand much faster not this massive delay as they move further and further into an untenable position.
Investing in these sinking EUR ships is what got us here not the solution.
The fundamentally flawed EUR dream is that countries like Greese, Italy and Spain would be able to exist under the same currency as Germany and France… sorry but in my opion it never could and never will work.
While Germany and France have basked in the sunshine of an artifically lower currency to their countries prosperity the rest have suffered with the exact opposite.