The Greek Crisis
Some have discovered another Lehman Brothers in it, the spark that may ignite an explosion in the financial markets and the euro. The scenario of a possible bankruptcy of Greece may well have been there for years now and has been a cause of intrigue and worries. For no single country in the euro region has yet been “dropped” by its partners.
Patrick Artus, an economist of the Natixis Bank says, “On the face of it, there is little risk of contagion.” In fact most European banks got rid of Greek debt securities held by them, especially after restructuring of the country’s debt in 2012.
Greece’s debt now exceeds 320 billion euros and would mainly affect European countries, the International Monetary Fund (IMF) and the European Central Bank (ECB). But there may always be irrational movements in the markets which may have a negative effect by creating panic. Such a situation could make the Greek bankruptcy a contagious disease, spreading across the whole of Europe and beyond. The initial transmitters of panic may be the Greek banks, the lungs of the economy. Anxiety has already begun to play its part in Athens forcing the country last Sunday to impose capital controls and limiting withdrawals so money doesn’t leave the banks and the country. The queues lengthen before the closed doors of many banks. Investors are trapped. Many older people in those queues, including the pensioners, have been seen to be in tears.
The Greeks have reason to panic. In case of bankruptcy of the country, the Hellenic banks, which hold 30 billion euro of Greek debt, would have to stand on one leg. Already weakened by the flight of capital for several weeks, these institutions would not be able to recover from such a disaster. Some of these banks have branches in foreign countries, like Romania, Cyprus and Bulgaria. Will we see the same queues before the counters in Bucharest, Nicosia or Sofia? Will the banks impose capital controls to prevent the drying up of their subsidiaries too? Could such a scenario endanger those other European countries?
The bankruptcy of Greece, an unprecedented event in the eurozone, would not fail to create panic among buyers of sovereign debt securities. The hunt for the next “weak link” in the monetary union, another fragile state left on its own with sovereign debt, could then resume. Will it be Portugal, just out of an assistance plan? Spain, attempting a complete reinvention of its business model? Or Italy with its debt of more than 2,000 billion euro? Any such “suspect” country could see interest rates soar.
On Monday, tensions were already being felt in the market for sovereign debt. For a country already in a delicate position, market sanctions can plunge the economy into recession: deficit financing will add to the cost of credit for individuals, businesses would try to escape and the whole economy may seize up.
The situation is such that there are just too many small clots in the blood that might travel to the heart.