The “Greek Crisis” is a Global(ization) Crisis

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Let’s get all agree to agree that the “Greek Crisis” is not really about Greece.

It seems unfair to blame the whole debt crisis on one small country in a far corner of the eurozone; and a late-comer to it at that.

After all, Greece’s total economy is only a tiny fraction of the eurozone total GDP.

Now really, how much money can 11 million Greeks spend?

As it turns out, quite a lot actually.

According to Bloomberg, the second bailout package for Greece may be as high as €85 billion which is about $124 billion. The total amount will be about €195 billion, which includes last year’s €110 billion bailout.

That’s a lot of ouzo.

True, the many billions Greece borrowed from eurozone banks, which it will never be able to repay, is threatening the very existence of the euro…

But, with the new deal that has been struck, everything will be just fine...

The eurozone countries will cover about 70% of it, with the IMF picking up the slack on the remaining 30%.

At least, in theory…

In reality, European banks don’t have the money to cover Greece and the next country behind it in the growing line of eurozone countries in crisis.

Nope, it’s not just the Greeks anymore; it’s a horse race between Italy and Ireland, with Spain coming up fast.

Italy’s and Spain’s debt pictures are now coming into focus.

According to the Wall Street Journal, banks are reducing lending in Italy and Spain; and one London bank is even withdrawing un-used credit lines from both nations.  Another “major European bank” may do so as well.

In fact, many banks are just parking funds at the European Central Bank instead of lending it each other for even a short term.

In the banking world, that’s survival instinct taking over.

The downside is that by limiting its access to credit, there is more pressure on Italy and Spain to handle their debt crises with less money.

No reason to panic, though; European bank officials are on top of it.  In fact, they say that they are “monitoring” Italy “moment by moment.”

Whew!

Meanwhile, Moody’s has just downgraded Ireland’s debt to junk status.  That tells us that Ireland’s finances have already begun their downward slide…

The downgrade in ratings means Ireland’s borrowing costs will rise, if it can access any credit at all...

No question about it, Europe is in trouble; the debt crisis is spreading.

You see, when banks pull back and stop lending, they stop being banks and become shoe boxes, sock drawers, and mattresses; places to stash cash where nobody can find it.

And this behavior is contagious; others will do the same.

Why?

Because it’s a defensive posture, they have to protect themselves.

Or at least try.

As a Citigroup economist noted, “Apart from the ECB (European Central Bank), there are currently no big wallets…capable of supporting Spain and Italy.”  But that’s not the end of it.  It’s just becoming more visible…and bigger.

In fact, it’s becoming much bigger than the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain) altogether.

Maybe the name should be changed to the “GIPSI” countries because that’s how they’ll be living soon.  Just a thought.

Then again, perhaps we all will.

The “Greek” Crisis is indeed bigger than Europe.

As it escalates, its effects will be felt in the US.

American money market funds are heavily invested—up to $800 billion—in European short term debt.

George Sauter, chief investment officer at Vanguard Group, Inc. says that for the debt crisis to threaten U.S. money funds, “it would take a very rapid decline and not just in the smaller European countries...You'd probably have to see Spain and Italy get into difficult shape.”

Italy and Spain are now, officially, in “difficult shape.”

And, even though US money market funds are in short term debt, some as short as a week, they are at risk.

They are feeling jittery.  And well they should.

The European banks’ defensive actions reveal that even short term debt is risky. And they should know.

The effects of the growing debt are also being felt in financial markets around the world. The latest news caused stock values to drop in the US and across Asian markets.

Clearly, the debt crisis and its effects will not be contained.

But as noted earlier, the debt crisis is not about Greece at all.  It’s not even about Europe.  It’s not even really about economics.

No; what it’s really about is globalization.

Or rather, the horrible realities of globalization.

The world’s financial systems are all terminally interconnected, and therefore, eventually, we will all go down together.

Why?

Because when Greece was allowed to borrow vast sums without any real responsibility, it was not an economic failure, but a political one.  No one in the eurozone had the guts or the wisdom to say “no.”

What the Greek eurozone experience also shows is that what works for one country does not necessarily works for another.

There was a reason Greece joined the eurozone so late: its political and economic culture was not a good fit for it.  It’s slower, weaker economy was better off with a weak drachma.

Like it or not, the Greek “way of life” has largely determined how the Greek economy has performed over the years; just as the German way of life has led their economy to being what it is.

Globalization is the eurozone writ large.

Neither the European Union nor globalization can adjust to the diversity in cultures and geographic differences.  Both force standardization upon all parties.

One size fits all.  But it doesn't, really, does it?

And the results?

Disaster.

Is this not evident to world leaders now?

Probably not.

I’m afraid that the motivation behind globalization has very little to do with economics, but much more to do with the consolidation of power.  And the small nations will lose that contest almost every time.

Today, the economic fates of all nations of the world, big and small, are tied together.

And Greece?

Hard to believe that the spending habits of a small country who gave us the tragic myth of the Achilles Heel could have such impact upon the world, huh?

The irony is that as all the riots, violence and economic strife around the world escalates, Greece may remain the least affected.

It will still be its old, plodding self, selling sun-splashed holidays, Parthenon tours, and cheap ouzo to a weary world.

Hmm…Maybe it really is about Greece after all.

And those are…The Gorrie Details.

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