In light of classes being canceled today let’s take a look at what the market has been hyperventilating against for the past few weeks – the Greek debt situation. The pundits on TV have labeling the situation as “insignificant” to the “beginning of the end for the Euro”, and everything in between.
Let’s take a look at this in a more objective manner. Here are a few my thoughts on the fact
- Greece is indeed in a bad fiscal situation, but what has happened is far from unique
- Greece accounts for a mere 3% of the Eurozone GDP
- The last time I checked, the beautiful state of California is in a similar situation with a budget gap of $22.2 billion
- Remember, CA is the world’s 8th largest economy (the size of France!) while Greece ranks #33
- How come no one is talking about the CA crisis???
- There is simply no way the EU will allow Greece to exit the Euro, a bailout of some sort will be in order
- Most likely, help will come in the form of a debt guarantee through the ECB after demanding a pound of flesh from the Greek government in terms of fiscal reform
- The market is NOT hyperventilating about the actual dollar amount or what actually occurred in Greece but the larger implications of such a bailout
- A bailout for Greece will spur requests for aid from other struggling Eurozone countries
- For years the EU has allowed the PIIGS (Portugal, Italy, Ireland, Greece, Spain) lots of leeway in terms of fiscal policy despite their prior commitment to contain deficit to 3% of GDP upon joining the Eurozone. The PIIGS routinely ran double digit deficits.
- Investors are concerned about the grand experiment that the Euro essentially is: can a group of countries with independent fiscal policies but a common monetary policy form a common currency??
It’ll be interesting to see how this plays out.
