Greek Drama: Why Europe Will Blink

Last Updated Jun 16, 2011 10:59 AM EDT

How can a tiny country in Southern Europe occupy center stage of the international economic community and strike fear in the hearts of investors?

Greece suffers from a classic problem: it spent more than it took in and racked up a lot of debt to bridge that gap. The government compounded its problems by lying about its dire condition, before finally owning up to the real numbers last year.

The Greek debt crisis raises two major concerns:

(1) a number of large European banks and countries have extended loans to Greece - those institutions would suffer big losses if the country were unable to repay its debts. How big? According to RBC Capital Markets (as cited in the Wall Street Journal) here's who's holding Greek debt:
  • Greek banks: EUR50 billion
  • German banks: EUR17 billion
  • French banks: EUR11 billion
  • Italian banks: EUR2 billion
  • Spanish banks: 0
  • Rest of Europe banks: EUR9 billion
  • Rest of World banks: EUR1 billion
  • IMF/EU: EUR53 billion
  • European Central Bank: 47 billion
  • Asset managers, sovereign wealth funds, central banks: EUR151 billion
(2) If Greece were to default, it could spread to other weak European economies like Portugal, Ireland and Spain

Considering that European banks are in way worse shape than their US counterparts and a Greek default could cause a massive cascading crisis across the European Union, it seems highly unlikely that the International Monetary Fund and Eurozone won't figure out a way to prevent Greece from defaulting.

That said, don't Greece wasn't the only reason that stocks plunged yesterday. I spoke to CBS television stations this morning about all of the factors that catalyzed the sellers and what investors need to do now.

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    Jill Schlesinger, CFP®, is the Editor-at-Large for CBS MoneyWatch. She covers the economy, markets, investing or anything else with a dollar sign. Prior to the launch of MoneyWatch in 2009, Jill was the chief investment officer for an independent investment advisory firm. In her infancy, she was an options trader on the Commodities Exchange of New York.

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