Why is everyone so worried about Greece?

Greece is tiny country on a European and world scale. Why is it in the news so much? This is certainly a reasonable question.

For 20 years France and Germany have been selling weapons and lending money to Greece. More precisely French and German banks have been lending to the Greek Government and industry to finance Greek purchases of French and German goods.

This is not a rare phenomenon – what most countries call “foreign aid” is exactly that.

The problem therefore, and why Greece is so much in the news, is that if Greece defaults on its debt then the French and German banks will need significant recapitalisation. The sums involved are manageable – 200bn to 400bn Euros spread across the banks of Europe and the US. What is more pernicious is the precedent that this sets and the threat therefore that Spain and Italy will follow as they are certain to – driven by the markets and increasing borrowing rates. This is the real danger as this starts to threaten the whole banking system across Europe and the US. That’s why Greece matters!

The logic is therefore that it’s better to force Greece out of the Eurozone than default. Best case, as one of Merkel’s aids said the other day, is that Greece “vollows ze rulz” and continues its austerity program. I did laugh at the image of these poor Germans clamouring for the maddened Greeks to “vollow ze rulz” whilst the whole world is burning!

 

 

 

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