Why the Greek crisis has global reach

Portugal and Ireland may follow Greece in asking for more financial help, which could drive up the cost of borrowing money across Europe and elsewhere.

By , Correspondent

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    Protesters stand in front of the parliament building during violent protests against austerity measures in Athens' Syntagma (Constitution) square, June 28, 2011. With Greece teetering on the brink of bankruptcy, parliament is due to vote this week on a package of spending cuts, tax increases and privatizations agreed as part of a massive bailout aimed at averting the eurozone's first default.
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World markets, financial institutions, and governments have been anxiously watching for resolution to the Greek debt crisis. If Greece were to default, some experts predict losses to banks and investors across Europe – and even in the United States – that would undermine global economic recovery and spark another worldwide crisis.

Greece received a €110 billion ($156 billion) bailout package in May 2010 in hopes the infusion would help it pay back creditors. But the country proved unable to pull itself out of a financial mess caused by overspending, inability to collect taxes, and turmoil created by the global financial crisis. A year later, Greece needs the last €12 billion ($17 billion) portion of the loan to avoid defaulting on obligations.

The global reach of the Greek crisis is both real and psychological. Banks in countries around the world hold Greek sovereign debt. France and Germany, which have the most exposure, hold €15 billion ($21 billion) and €22.6 billion ($31 billion), respectively. But both countries have reduced their exposure over the past months significantly, almost cutting them in half in the case of Germany.

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Many worry that Portugal and Ireland may follow Greece's lead in looking for financial help, and this will be a troubling signal to creditors and may drive up the cost of borrowing money, which became a critical issue in Greece.

Much of the dire forecasting surrounding the Greek problem may be overblown. European economies are robust enough to take the blow if the worst happens in Greece, although the euro currency would plunge and the economy would slow.

But it's unlikely Europe will let Greece default. Germany and other countries in the eurozone have signaled they will stand behind Greece no matter what. It's unclear what the eventual outcome will be, but even with deep austerity cuts, Greece eventually needs a second bailout that could be partially funded by rolled-over private debt. French banks already agreed to its government's request and other European banks appear ready to follow.

It boils down to semantics. Holders of Greek debt would "voluntarily" agree to delay the maturity of payments. It would essentially be a default, but one that banks, investors, and European politicians could organize and handle to avoid major consequences.

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