Big Trouble in Little Athens

Greece has received a lot of publicity since its financial problems surfaced last year.  And yet it seems like many people still don’t think Greece’s problems are all that important.  For example, last week I heard a popular financial radio host basically ridicule the notion that Greece’s financial issues could affect America.  His reasoning was that Greece’s economy is tiny compared to the Eurozone or the US (in terms of GDP), and because of that, a Greek failure is nothing for Americans to worry about.  Well, here are a few things to consider.

First, the problem is measured by the amount of money that Greece owes to various creditors and not by the size of Greece’s economy, so it doesn’t make sense to arbitrarily compare GDP values.  Also, the fact that Greece’s debt burden is greater than its GDP would make that exercise faulty anyhow. And ironically enough, Greece’s tiny economy is actually making matters worse – since a larger economy could help Greece get out of debt faster.

Second, the US has more exposure to Greek debt than people realize.  European investors may have been the primary buyers of Greek debt, but US banks were the primary insurers against a Greek default.  In other words, if Greece doesn’t pay, then US banks may be liable for losses (even without holding the debt). Figure 1 shows this point clearly.  Compared to Germany, the US directly purchased much less Greek debt.  However, adjusted for indirect exposure, the US actually has more overall exposure to Greece than Germany does.

And third, Greece is only the tip of the iceberg.  If Greece fails, then who’s next?  Remember that there are a number of peripheral Eurozone countries with their own financial problems including Portugal, Ireland, and Spain.  If Greece doesn’t pay, then why should they?  Taken together the problem doesn’t look so tiny anymore.  Given the risk of contagion, it could actually make the financial crisis of 2007 look like a walk in the park.  And yes, the US has exposure to those other countries as well.

I’m no policy guru and I don’t claim to have the solutions.  I’m just pointing out that the problems brewing in little old Athens are much bigger than some “financial experts” claim.  A Greek default will have worldwide repercussions that can impact even the mighty US of A. If you still can’t see why that is, then please refer to Figure 2 below.

Figure 2: Anatomy of a Recession

 

Victor K. Lai, CFA

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