Update on the Greek Crisis and Some Good News

Last Updated Oct 10, 2011 11:04 AM EDT

I've been receiving lots of calls and e-mails from concerned investors, specifically how the situation in Greece may affect markets both domestically and internationally. I thought it was important to take a look at the current situation, as well as some of the good economic news so you have a balanced perspective.

Let's begin by acknowledging that we have a crisis with the potential to do significant financial damage. The focus of investors is now on Greece, with about $500 billion of debt outstanding, and an unsustainable debt-to-GDP ratio of over 160 percent and growing. Thus, the only questions are:
  • When Greece will default (as it seems more like a certainty by now)?
  • How big will the losses be?
  • Will the process be orderly?
  • Will it be contained to just Greece?
The fear is that there will be a contagion that will spread to Portugal, Ireland, Spain and even Italy. To show how dangerous this potential situation is, it has been said that while Greece is perhaps too big to let fail, Italy is too big to save. The market is very concerned that a default on Greek and other sovereign debt will lead to another Lehman Brothers-type crisis, resulting in not only a financial crisis, but a global recession like the one of 2008. And while U.S. banks were forced to recapitalize during the 2008 crisis, European banks didn't take such actions to shore up their balance sheets. Thus, they're not in as good a shape as U.S. banks for handling defaults. (Note that U.S. banks have relatively little exposure to European sovereign debts.)

If, when, and how this situation gets resolved is what investors are concerned about. Investors know the great difficulty the U.S. faced in coming up with a solution to our crisis, which we eventually did -- and we only have one government and two parties trying to reach agreement. Europe has 27 governments and central banks that must agree before a solution can be implemented. And different countries have different concerns, within countries different parties have different views, and European countries typically have more political parties they have to get to agree than we do. The uncertainty created while they debate the situation is what's causing the market trouble.

Photo courtesy of archer10 (Dennis) on Flickr.
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    Larry Swedroe is a principal and director of research for the BAM Alliance. He has authored or co-authored 12 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.

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