Just when you thought it might be safe to invest in the Euro, the debt crisis in Greece is leading the country to consider exiting the EuroZone and to print its own currency. The mere threat of this has caused the European Commission to assemble for an emergency meeting in Luxembourg today. Finance Ministers are calling for a drastic renegotiation of Greek′s debt, especially facing the prospects of having to write off the 110 Billion Euros spent so far to bailout Greece. The impact on the European Central Bank, as well as the entire banking system in Europe, could be horrendous.
The United States would be on the tick, too, as we supported the International Monetary Fund to assist in the Greek bailout. About half of the $159.5 Billion dollars has already been spent. Should Greece leave the EuroZone, it would begin printing its own currency to fund its budget woes, causing severe inflation. The move would essentially be defaulting on its national debt.
In the past two weeks, the ECB and EuroZone ministers negotiated another deal to bailout Portugal for about 80 Billion Euros, about $116 Billion dollars. This helped push the U.S. dollar higher against the Euro after reaching all time lows. Greece currently owes about 200% of its GDP in debt. Drastic austerity measures have led to nationwide strikes, cuts in wages, benefits and pensions.
The financial mess is directly related to the 2008 Crash. Despite rumors of a recovery, the fundamental root causes were never dealt with. Many of the bonds Greece had issued to cover its overspending were financed using Collateral Debt Obligations, CDO, based on bundled subprime mortgages purchased from American banks and hedge funds. After the collapse of Lehman Brothers, it became apparent that these CDO, as well as the Credit Default Swaps (CDS) purchased as insurance, were essentially worthless. Countries like Greece, Ireland, Spain and Portugal were over-exposed and the financial house of cards collapsed.
Since the root causes of the financial debacle have yet to be addressed, despite legislation in the United States and a broad, the potential for a second flash crash looms brightly. Should Greece follow through with this latest threat, the entire EuroZone could begin to unravel. While a little bit of chaos might benefit the U.S. dollar, the need for more bailouts would more than just counter-balance, plunging the world into an even deeper recession than before.