Sometimes it’s hard to see what all the fuss over Greece is about. It’s a country with a landmass only slightly larger than Colorado and its main industries are tourism, fishing and shipping. Greece is not an economic powerhouse, not a player on the world stage and even terrorists pass through on their way to more tempting targets. Despite its diminutive size and lackluster economy, Greece has the potential to start a fire that could end up burning American investors, most of whom couldn’t pronounce Thessaloniki, let alone find it on a map.
For all of what it’s not, Greece’s one important quality is that it’s part of the European Union, or EU for short. That means all of Greece’s transactions are denominated in the EU’s artificial common currency called the euro. For years, since 2010 at least, Greece has been teetering on the edge of withdrawing from the European Union.
The main problem Greece faces is their social programs are overly generous compared to its income. To make the budget ends meet Athens has relied on loans from the European Central Bank (ECB), backed mostly by countries with a solid manufacturing base like Germany. For at least the last five years, Greece has been going farther and farther in debt and the ECB, prompted by Germany, has tried to impose Draconian austerity on Greece’s social programs. Greek citizens responded to those cuts with mass riots and basically burned the country down and threw out the government. Since then Greece has shuffled along, an EU zombie that’s not alive but never quite dies. But today, while yet another set of last-minute meetings goes on to try and keep Greece in the EU, many are suggesting that a Greek exit from the EU is all but inevitable. Greece’s exit from the EU could end up lighting a fire that ends up burning Wall Street.
Shock To Currency Markets
To be clear the biggest currency shock is going to be in Greece but, as we’ve seen in the past with Russia and some South American countries, currency shocks have a tendency to ripple around the world. If Greece leaves the EU they’ll go back to using their own currency, the drachma. That will get revalued on currency markets and could lose as much as 50% of its value or more! Overnight, Greece will be transformed into the European version of a third world country. Greece will be paying back loans made in euros with drachmas and investors will take a major beating. Currency markets could implode under the strain while gold and silver prices would explode. Greek citizens, the few who already haven’t taken their euros out of Greek banks, will see their savings vaporize. If you thought the riots were serious before, those will look like the warmup act compared to what’s coming.
Shock To Equity Markets
If markets were truly rational than a Greek exit from the EU would barely make a ripple. But markets are not rational; they’re panicky, irrational and easily stampeded. Global equity markets have been on 10 year high and many feel they’re due for a correction. A European currency crisis could be just the spark to trigger a meltdown in European stock exchanges, which would take down global equity markets with them. A crisis in Greece could kick off a bear market that lasts for years and wipe out trillions in equity.
Investors Holding The Bag
It’s a certainty that investors loaning Greece euros and getting paid back in drachmas are going to end up losing money; a lot of money. The math of bad loans is brutal and the overhang could trim European investments for years. If EU markets stumble, Wall Street will fall down that hole with them and investors in the U.S., who may not even have any overseas investments, will end up taking a hit.
The problem the world faces with Greece is not that it’s particularly significant in and of itself, but the fact that it would make a very nice spark that could set already volatile markets on fire. At the beginning of every major financial meltdown there’s one small incident that kicks off the avalanche. With the world currency and equity markets already on edge, news that Greece is leaving the European Union could easily set off a chain of events that brings the whole thing crashing down.