With Greece on the verge of default, we're about to learn how little has really changed since governments around the world wrote the last round of bailout checks to prop up failing financial institutions. Just as the collapse of the U.S. subprime mortgage market rippled into nearly every corner of the global financial system, so too will a pending default by Greece.
A look at Greece's borrowing history shows that defaulting on debt obligations is nothing new for the country. Over the last two centuries, Greece has been in a state of default more than half the time.
What's different today is the interconnected nature of the global financial system. In the past, a default was a traumatic event for financial institutions with direct exposure, but it didn't pose a threat to the rest of the world. Unfortunately, that's no longer the case.
A Greek default would send shock waves through Europe's banking system. Massive write-downs by banks are sure to be followed by even larger taxpayer-funded bailouts. Similar to the response to the subprime crisis, governments will argue that some institutions are simply too big to let fail. And most people, frightened by the likely consequences of such a failure, will agree.
But the cost of these new bailouts won't be limited to Europe. A Greek default would start in Athens, but it wouldn't be long before it's felt in Paris, Berlin, New York and Toronto. In today's intertwined financial markets, everyone has exposure to everyone else's problems.
The European Union has already responded to a shift in Greek politics by saying that if they don't implement the austerity measures required of them, the country will not get any further bailout money. And if Greece does not receive the bailout money, it will be in default and will almost inevitably leave the European Union.
Then Greece's departure will make Spain, Italy, Portugal, Ireland and possibly even France more likely to take their leave of the European Union.
If Greece defaults on its debt, someone is going to lose a lot of money. That "someone' could be German & French banks. Also, the _derivatives_ tied to Greece defaulting means that "someone' will lose a lot of money. The European Union may very well therefore need to step in and print who knows how much money to contain the crisis.
Compounding these problems, Ireland is holding a referendum at the end of May to vote on the austerity measures imposed on it by the European Union. Will Ireland indirectly vote to leave the European Union?
Bottom line: The situation in the European Union continues to erode. For the first time, one euro trades below $1.30 US. With so many U.S. S&P 500 companies having revenue exposure to Europe, is it any wonder the stock market has been in a free-fall as of late?
How will all this play out?
Despite the cash that large corporations have on their balance sheets, they are not spending. Due to Cisco and other technology firms' weak earnings outlook, Internet technology spending growth worldwide has been slashed by many forecasters and analysts for the remainder of 2012.
There are clear signs the U.S. economy is weakening considerably, especially when considering the earnings outlook for the remainder of 2012 from key companies within the S&P 500. After a great start to the year, May is proving to be a terrible month for stocks. The Dow Jones Industrial Average has dropped 518 points since the beginning of May. Corporate insider selling of stock is at a record high.
The Greek elections struck fear into the hearts of the global banksters. And if the next Greek election produces an anti-austerity government, Greece will almost certainly make a speedy exit from the euro. If this happens -- and it now appears inevitable -- the consequences for the global economy are extremely gloomy. Yet US media and US politicians are largely silent on the issue, almost as if nothing were happening.
What specifically will happen when Greece leaves the Euro?
Foreign banks hold over $90 billion in Greek debt in the public and in the private sectors. These enormous losses could very well bring down banks in Europe and the US. How and why? The struggling Euro countries such as Italy, Spain, Portugal and Ireland will see their borrowing costs skyrocket because wealthy investors will be more reluctant to waste anymore investment money on risky Euro countries; this will then guarantee a further downward spiral of bailouts and bankruptcy, which will eventually bring down major banks throughout Europe and the US.
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