Greece tottering--watch out below

Sigh. As the New York Times reports, Greece's financial state is deteriorating rapidly. Rates for its bonds are going through the roof which means it will soon be unable to finance its debt, i.e. it will be insolvent, busted, broke. Fellow EU members, led by Germany and France, have been hemming and hawing for months about how to get Greece out of its predicament. Vaguely worded yet dramatically announced plans have been put forth. Clearly the markets aren't buying them.

So why care about Greece? For the same reason we should have cared about Lehman Brothers. As small as it is Greece really does have the potential to be a domino. If it goes under attention will turn immediately to the other PIIGS: Portugal, Italy, Ireland and Spain which all have similar problems. In addition, much of Greece's debt has been financed by German and French banks which, like their American counterparts, are not in the best shape to begin with. No one knows for sure what the consequence of a Greek default would be but given the fragile state of the global economy no one wants to try it and find out.

Unfortunately there are no good options. The gist of the EU's message to Greece is that it needs to severely tighten its belt and reign in its spending. This would certainly mean a major shrinking of the Greek economy and real pain for its citizens. Greece may, and likely will, just say no. One piece I read says Greece should just pull out of the EU and the Euro, print up new drachmas, and let the lawyers figure it all out. Again, what Greece does could trigger a chain reaction spelling the end of the Euro itself--and that would really be a mess. A much deeper recession in Europe would be almost inevitable, with global repercussions. Stay tuned.