Tea Leaf: A Greek stitch in time?

Published: Tuesday, June 21 2011 3:54 p.m. MDT

The obvious question on the minds of many is, "What does the debt problem in the tiny nation of Greece have to do with the U.S. and me?" The resolution of the issue has more to do with us than you may think.

Our column of 16 months ago (dated 2/27/10) was entitled "A Shot Across the Bow." It discussed the tenuous Greek debt situation at that time, with a warning for larger nations, including the U.K and the U.S.

That column noted, "The greatest threat regarding the current Greek debt solvency debate is the possible domino effect involving other nations. A Greek default on its debt, or a painful plunge in the value and marketability of Greek debt securities, would likely be followed by similar debt issues for other nations. Such a domino or cascade effect would be difficult to stop once the process had begun."

Dominoes

Well, here we are. A massive Greek financial bailout equal to $157 billion during 2010 by other European nations and the International Monetary Fund (IMF) was eventually followed by similar financial bailouts for Ireland and Portugal. Worst-case fears now include the possible need for a bailout of a much larger Spanish economy as well, with possibly Italy and Belgium not far behind.

The Greek debt situation has been one of ebbs and flows since early last year. Initial market euphoria that the Greek situation had been dealt with effectively soon gave ground to the other national bailouts.

Grecian pressures

Required austerity measures within Greece to raise taxes and cut spending in order to hopefully reduce massive budget deficits were met with violent protests in the historic streets of Athens and other cities. The critical tourism sector, which accounts for much of the nation's revenue and supports nearly one job in five, has been hit hard as many visitors have gone elsewhere.

Greek economic output has declined during the past year, making it even more difficult to generate tax revenues and cut spending. Unemployment is near 15 percent.

The need for more emergency funding — another bailout — is clear. Larger European Union (EU) nations and the IMF are putting another financial package together. Any new funding requires more austerity from the Greeks: more tax increases, more wage cuts and the potential sale of $70 billion in state assets.

Greek citizens protesting these demands are in the streets, highly critical of those who demand these actions. Money yes, tough choices no.

European realities

German and French governments agonize over the new financial realities of more and more financial support for the Greeks and possibly for other EU nations. German and French people are strongly in favor of NOT providing these funds.

Two major issues compel German and French leadership to provide more funding:

First, the reality that German and French banks have been major buyers of Greek and Irish and Portuguese and Spanish bonds (debt). They recognize that massive losses on bond holdings by major German and French banks would only cause other financial headaches.

Second, the strong wish of the German and French leadership to maintain the integrity, the prestige and the validity of the European Union.

Coming weeks will provide greater clarity as to the viability of the EU. It is not inconceivable that nations such as Greece may eventually be discretely invited to drop their EU membership. It is just one of many options to be considered as the Union frays around the edges.

Coming weeks will also provide greater clarity as to the chance that a devastating domino effect could embrace many nations, in Europe and around the world. Another global financial calamity — small odds at this point in time — could finds its roots in Greece.

Inflation stuff

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