The driver of the crisis, beginning in August 2007, was over-leveraged banks. Choking on losses in the form of the now-infamous "toxic waste," financial institutions began squeezing credit for the rest of us, a process that kicked into high gear when Lehman Brothers went bankrupt on Sept. 15, 2008. That phase was winding down before markets went to war with Greece.
Now what do we have? Over-leveraged countries.
You hear a lot about the PIIGS these days (Portugual, Ireland, Italy, Greece and Spain) but Greece truly stands out for one specific reason: it is, for all practical purposes, a failed state. You usually hear this with reference to places like Somalia or Afghanistan, but Greece suffers from the same problem with fewer guns: it cannot govern itself.
It makes you yearn for a demonstration of divine power, like when the Greek gods of myth would reach down from Mount Olympus to correct the folly of mere mortals.
"If you switched off the sun, we would go bankrupt in a few days," a prominent Greek critic of Greece told me once. This crisis has been long in the making, and only the Mediterranean sun has given the country a reprieve -- literally. It drives tourism and agriculture, two bright spots in an otherwise dreary picture.
The Greek government spends too much money and its economy is not productive enough. And the political class feeds off the state, paying itself large pensions and comfy salaries while decrying reform as brutal capitalist robbery. Why do you think even the mildest changes bring out the riot police?
It may be incapable of the changes it needs to make, much as banks were incapable of recapitalizing themselves without help from strong governments. So, the only solution comes from without, in this case the European Union and the IMF.
It's not yet clear whether the EU and the IMF will step in firmly enough to prevent the Greek crisis from spreading, contagion like, to the other PIIGS. Right now, markets are driving spreads between Greek bonds and German ones -- considered gilt-edged -- to historic levels, their way of expressing a profound lack of confidence in Greece and those in a similar position. You don't have to be a financier to be scared by charts like this one:
Banks of all stripes in Europe are exposed to Greece's troubles by holding its bonds, and American banks are exposed to Europe in all sorts of ways: financial links, trade and the like. Some even hold Greek bonds. With â‚¬273 billion in outstanding bonds, that's a lot of trouble to go around.
So ponder the scenario: Europe fails to find the will to stop the Greek crisis in its tracks, and Greece defaults. Banks lose money, and recoup those losses by curtailing already-tight lending. That amplifies the problems of the other PIIGS and they have trouble refinancing their debts, with Spain being the country that really scares us all.
Spain's government owes about 1.1 trillion euros, and a rescue of Spain, by some estimates, would cost about as much as all of Greece's outstanding debt. But somehow, somewhere, you have to draw the line in the sand, and the later you do it, the more it costs the taxpayer.
Someone has to come up with that money, and on some level it becomes money that's not available for productive investments, either by the private sector or by governments that want to stimulate their moribund economies.
In all this, you wish that Greece's creditors -- our friends, the banks -- would take a haircut and reschedule or eliminate some of the country's debts. But that would mean additional losses that they would cover by curtailing credit.
There is no bright side to the Greek crisis. And no Greek gods to come to the rescue.
Photo from George Laotaris via Flicker