Greece’s Challenge and our Exposure to it: A Primer

The United States’ tepid economic recovery is being weighed down by the financial crisis in Europe.  That was the message to the Senate Banking Committee last week at a hearing about what the European debt crisis means for Americans. 

Although the movement of the Dow Jones Industrial Index gets much of the attention as it tips up or down with each bit of news coming from across the pond – the effect on Americans extends beyond the price movements of our domestic equities. 

“The financial stresses in Europe are undoubtedly spilling over to the United States by restraining our exports, weighing on business and consumer confidence, and adding to pressures on U.S. financial markets,” said Steven Kamin, director of the Division of International Finance at the Federal Reserve, in front the committee.

The current center of gravity for this mess is Greece.  It has been mired in a tumultuous two-year (and counting) financial saga over worries that it won’t be able to pay its bills.  These come in the form of sovereign bonds bought by banks and individuals.  The problem is; these purchasers also buy and sell assets in other countries.

Many market watchers are worried that if Greece doesn’t pay up, spurned investors around the globe might reduce their total volume of investments.  This would increase the cost of borrowing for other countries and companies and, some argue, could send the global economy into a tailspin. 

That concern, by itself, is dragging down our economy now.  So when will this all be resolved? 

The short-term answer is March 20^th - when €14.5 billion worth of Greek bonds come due. That’s $18.9 billion.

Greece doesn’t have that money now so its Prime Minister, Lucas Papademos, is trying to secure a bailout from the European Union, the European Central Bank and the International Monetary Fund – the so-called Troika.  And, if Greece doesn’t get its bailout, it won’t be able to pay back those banks and individuals.

That would be a default.

Let’s look ahead to the world of March 20, 2012. By then, either Prime Minister Lucas Papademos will have avoided a default by successfully securing bailout funds from European leaders or…he will have failed and, depending on what expert you speak with, we might encounter a speed bump or a roadblock.

Papademos has to find common ground between two opposing interests.  On the one hand, he has the interests of the Greek people – many of whom have taken to the streets to protest and riot. They’re upset about austerity measures that would cut their pensions and wages.

But he also has to deal with the Troika, and they hold all the financial cards.  

They have promised Greece a $170 billion bailout – if the country can pacify its angry citizenry enough to reduce government spending and reform its industries.  

Irene Finel-Honigman, a Professor of International and Public Affairs at Columbia University, argues that Greece sits in a near impossible predicament. She compares its economy to those of the former Soviet states in the 1990s. 

The only difference is those countries had a decade to change the way they did business.

“Greece desperately needs at least five years to start to restructure its economy, it now has about six weeks,” Finel-Honigman said. 

She also doesn’t hold out much hope that the proposed reforms will solve the problem alone. A Greek recovery involves a daunting laundry list of conditions.

“Long term, only a global recovery, renewed investment, market confidence and endless rescue funds will allow these reforms to actually be implemented,” she said. 

That’s a tall order. 

And, the possibility the reforms don’t get implemented is what everyone’s worried about – including the members of the Senate Banking Committee.

So, for regular people uncertain about their job security or their 401ks; expect timid markets to be the norm for the next few weeks at least.

If Finel-Honigman’s five-part recipe for recovery is accurate, the saga will continue even longer.