And Now, a New Financial Crisis -- Made in Greece

Last Updated May 6, 2010 6:24 PM EDT

Investors pounded away at stocks today, and the reasons are not difficult to fathom. The Greece crisis is igniting panic that resembles the day when the financial crisis began in earnest.

Though Sept. 15, 2008 will live in financial infamy as the day Lehman Brothers went bankrupt and kicked the financial crisis into high gear, the real crisis began on Aug. 9, 2007 when the French bank BNP Paribas announced it would suspend withdrawals from funds linked to the U.S. subprime mortgage market. The next day, liquidity began evaporating from the financial system at a frightening rate as banks pondered how much in mortgage-related losses were out there (waaay tooo much, as it turned out). Credit markets deteriorated, making it hard for even the most creditworthy borrowers to get loans. Then: Bear Stearns, Fannie/Freddie and all the rest ... And Lehman.

If governments spent much of the last three years mopping up from that crisis, the very real possibility has emerged that they will spend the next three years solving a sovereign debt crisis that began in Greece early this year and shows no sign of abating. In other words, May 6, 2010 could become the new Aug. 9, 2007.

The brutal selloff today reflects a flight of money toward quality, with all the classic signs that entails. Money is flying toward Treasuries. The Dow experienced an intraday plunge on par with the 1987 crash. Bond spreads among weaker European countries are widening. And bank stocks are getting hammered, since financial institutions were already the weak links in the chain.

Market analysts are tossing around the word "panic" today, and with good reason.

The Greece rescue package announced earlier this week by the European Union and the IMF was supposed to draw a line in the sand. In a successful rescue, money would go into short-term Greek debt, at least, since Athens will surely get a cash infusion -- even if it doesn't make good on the longer-term commitments that would right its ship. Instead, the opposite is happening: Greece's short-term borrowing costs are rising.

Put another way: Markets are not convinced that Greece can even get started on the austere path to recovery that the IMF and EU are demanding of it, let alone emerge onto a growth trajectory.

Love or hate the TARP that rescued the American banking system, when word of it dribbled out on the afternoon of Sept. 19, 2008, markets roared their approval.

Deadly riots in Athens on Wednesday added some tragic theater to the storyline, but the real news was that the Greek opposition decided to vote against the first of what will be progressively more painful steps that Greece has promised to take. No national unity in crisis. Greece is behaving like a failed state, or at least a banana republic.

Just like BNP Paribas was just just about BNP, Greece, today, is not only about Greece. If you haven't already, take a good, long look at this graphic showing who owes what to whom in Europe. Basically, a bunch of rich countries loaned shaky countries (Greece, Italy, Spain, Portugal) money to live beyond their means and now the rich countries' banks are shaky. Kinda like the way cash-rich financial institutions of all stripes loaned Americans money to live beyond their means, isn't it?

In the end, a financial crisis reflects a basic problem: money got loaned to someone who can't pay it back, and the lender cannot cover the losses. And if there is a single good reason to panic today, it's that the international community's TARP for Greece -- to say nothing of Greece itself -- is not impressing anyone.

  • Carter Dougherty

    Carter Dougherty, a former economic correspondent for the International Herald Tribune and The New York Times, is fascinated by the intersection between policy and business, in the United States and abroad. He shared in a Loeb Award, business journalism's most prestigious, while at the NYT. But he still looks back fondly on his days trudging through central Africa, reporting on Congo, Darfur and other rough spots.