Saturday, January 30, 2010

If 7 Worrisome Things Aren’t Enough . . .

From Bloomberg (via Mike Shedlock/Mish’s Global Economic Analysis) we learn:

Greece is losing the confidence of bondholders that it will reduce the largest budget deficit in the European Union amid increased speculation that the country won’t be able to meet its debt obligations.

Dan Froomkin’s “7 Worrisome Things” that I posted about earlier were all domestic economic concerns. With the increasing interconnectedness of the global economy, we need to remember that there are international financial problems just as great as our own. A financial crisis half-way around the world can ricochet with unpredictable consequences.

Greece is universally recognized as the weakest link of the European Union. In fact, many now believe it should never have been admitted into the EU in the first place as the economic numbers used to justify it were probably fudged. Too late now.

Doubts in the financial markets are causing Greece’s borrowing costs to soar. To prevent a default, other EU member countries may have to come to its rescue with a bailout (sounding familiar?) But if that happens, what is the incentive for Greece to get its economic house in order? And what message does that send to the other EU members in financial difficulty, like Portugal, Spain, Italy, Ireland . . . ? All the options are looking bad and Germany, especially, is NOT happy as it knows it will bear much of the burden for shoring up its faltering EU partners.

A financial crisis in the European Union can’t not have global consequences—it’s just too big an economic player. So everyone is working to prevent it, right? Not necessarily, because there are ways to make money no matter what happens. Financial institutions try to hedge themselves against any eventuality. Then the question becomes, “Who’s betting on Greece falling and stands to make big money if it does?” and “Do they have the financial power to bring it about?” Perhaps Captain Renault should head to Wall Street and round up the usual suspects. And if your reaction is, "Surely no one would intentionally bankrupt a foreign country," then you haven't been paying attention.

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