Why You Should Pay Attention to What's Going on in Greece

The French and all European media today are full of the mess that is called the Greek crisis.

You should be paying attention, no matter where you live or work or keep your savings, because what is now unfolding in the Eurozone countries will impact the world, and no one will be spared some of the pain.

Last weekend, the European Union leadership thought it had made a deal with Greece to try to save it from sovereign debt collapse - that is, the Greek government has no money, has very reduced means of obtaining it from its taxpayers who are being forced to work reduced hours, or cannot find jobs at all (about 20% of them now), and who have had their tax burden raised significantly because of the fewer Greeks able or willing to pay taxes. And no international banks or private investors are willing to lend to Greece.

So, the Eurozone, those countries using the Euro as currency, cobbled together a plan to “save” Greece. The plan involved Greece foisting yet more austerity on its already-beaten population, along with banks who had lent to Greece undergoing the haircuts we discussed last week, to the tune of 50% losses. To make sure this would not damage the banks’ ability to continue as viable institutions (i.e., not becoming a whole world full of Lehman Brothers without money to do any of the things banks do routinely), the Eurozone told its banks to “recapitalize.” What the EU want is for banks to voluntarily take a 50% loss on their Greek loans and then go out into the capital markets to borrow in order to make up for their losses, which may amount to several hundred billion Euros.

The rest of the European Union is not directly affected, but they will be slammed, too, if their banks find that their loans to Greece, because they also bought Greek government bonds, are worthless. This also applies to American and other banks which lent to Greece.

Greece, in the person of its prime minister, Georges Papandreou, agreed to it all last weekend in Brussels. But, once back in Athens, he had second thoughts. Some European commentators are suggesting that he finally woke up to the fact that : (1) the Greek citizenry will not agree and there will be more riots and protests, (2) the country will fail anyway because of the draconian austerity program foisted on it by its EU brothers and sisters, and (3) when all this occurs, he, Papandreou, will go down in history as the politician who ruined Greece, caused its people to suffer more than ever before in modern history, and perhaps become the person who brought down the Euro itself.

That is the background of Papandreou’s decision last night to let the Greek people decide for themselves if they want to undertake this latest austerity program. He called for a national referendum - a simple yes or no - on all he had agreed to.

Here are a few of the reactions today in Europe :

“The Greek referendum project is anything but a gift,” said the German Federation of Private Banks and several German ministers.

“George Papandreou carries a very heavy responsibility in calling for a referendum,” according to the Belgian prime minister.

“It is impossible to see how the decisions of the EU last weekend can be carried out if we are to have a Greek referendum,” said the large French bank BNP-Paribas.

Another large French bank agreed, saying, “this referendum opens a Pandora’s Box concerning just how much loss the banks which lent to Greece will have to take, perhaps 100%.”

Not a pretty picture, and the stock and bond markets of the world reacted almost in unison today - by falling fast and far.

Italy’s stock market is down almost 7%, Germany’s and France’s almost 5%, Britain’s and Switzerland’s 3%. Asian and American markets took similar hits in the 2% range.

The bond markets rose, because investors were looking for somewhere safe to put their money - safe from the Greek contagion, as it is more and more being called.

And, the US Dollar rose more than 1.3% against the Euro, while the Euro also lost ground to the Yen and the Pound Sterling.

This highlights the real problem. If Greece goes bankrupt, which almost everyone in the financial world now expects, it could very well bring down the Euro as a currency.

“A ‘no’ in the Greek referendum in January menaces the viability of the Eurozone with the real possibility of a Greek bankruptcy, and this could well force the collapse of the Euro,” were the words of the Fitch Ratings agency.

Why is everyone so worried about a country as small as Greece?

Because if the Greeks vote ‘no’ to the austerity program, then it is probable that international lenders (such as the IMF, the Chinese, the European Central bank), will simply turn off the spigot. No more money to allow Greece to pay its current debts - because keep in mind that without these infusions of cash, Greece would already be bankrupt. And, if Greece goes into bankruptcy, it will leave the Eurozone. And, how will that mess be resolved? Nobody knows. But, there are recurrent rumors in Europe that Germany is already printing Deutsche Marks just in case it needs to revert to its pre-Euro currency quickly.

Today, Italian 10-year bonds rose above 6% - remember that most 10-year government bonds trade at about 1.9 - 2.1%. The European Central Bank was buying Italian bonds today in an effort to stop the bleeding by lowering the cost of Italy’s borrowing to below 6%. Are we seeing the beginning of the collapse of the Italian governments’ debt system, too? Could be, and Spain is waiting in the wings. And, for these two sovereign debt problems, there is not enough available money in the world to fashion a real bailout.

Unless we want to talk about the kind of hyper-inflation that brought Germany to its knees before WWII and made it easier for Hitler to come to power. For Europeans, who have had the first half-century of peace in their entire history in the period since the Second World War, the spectre of division, war and civil collapse is far more real than it is for the rest of the world.