Make us your home page
Instagram

Greek default could trigger European chain reaction

Left- and right-wing demonstrators get into a fight at Syntagma Square in front of the Greek Parliament in central Athens, during a rally against the new austerity measures on Wednesday.

Associated Press

Left- and right-wing demonstrators get into a fight at Syntagma Square in front of the Greek Parliament in central Athens, during a rally against the new austerity measures on Wednesday.

FRANKFURT, Germany — Greece's economy is small, but the shock waves from a default on its debt could be amplified by links in the global financial system to hurt stocks, banks and entire economies far from the epicenter in Athens.

In Greece, banks could go bust, overwhelming the government's ability to bail them out, and lenders in France, Germany and elsewhere in Europe could suffer serious losses.

And the resulting market turmoil could strain the European Union's backstop fund, pushing European leaders to drum up yet more taxpayer financing, with voters already annoyed at funding other people's failed governments.

The exact effects of a Greek debt implosion are hard to anticipate, in part because no one knows how big the losses would be for bond holders, who stand first in the chain of dominoes. Beyond the immediate hit to banks, the biggest fear is that of contagion — a difficult-to-predict chain reaction that could roil markets and make it harder for other indebted countries to cope with their debts, with the result being higher borrowing costs for eurozone countries.

Some even say the end of that road could be one or more of the weakest euro members — such as Greece — leaving the shared currency, though the political will to prevent that remains strong.

Some are comparing a Greek default to the collapse of U.S. investment bank Lehman Brothers in September 2008, which triggered the most severe phase of the world financial crisis, freezing credit markets and leading to a slump in global trade.

"The risk of a 'Lehman moment' for the eurozone is increasing," says Neil MacKinnon, analyst at VTB Capital. "The nature of the eurozone debt and banking crisis is similar to previous financial crises in modern times because of the interconnectedness between the banking sectors and government debt."

Financial trouble can hit the wider economy if banks suffer losses that make them afraid or unable to lend to businesses. The International Monetary Fund has identified bank trouble as the biggest risk to Europe's recovery.

Markets would then wonder whether bailed-out Ireland and Portugal would also default, making it harder for them to return to borrowing markets.

For now, most observers and market participants expect some kind of new aid deal to tide Greece over in the short term — but fears that the EU might fail at that task is sending stock markets and the euro lower, after Greece's government called a confidence vote over its struggle to impose more spending cuts on its unhappy constituents.

That follows eurozone finance officials' inability to agree on conditions for a new aid package.

Nout Wellink, a member of the European Central Bank's rate-setting council, said European governments need to be ready to double the size of their bailout fund to $2.1 billion — a prospect that cannot please German Chancellor Angela Merkel, who faces unrest in her government's ranks over Germany's role as the leading funder of bailouts.

Greek default could trigger European chain reaction 06/16/11 [Last modified: Thursday, June 16, 2011 9:30pm]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Associated Press.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Former owner of Sirata Beach Resort purchases two Tampa Bay shopping centers

    Real Estate

    ST. PETERSBURG — After selling the Sirata Beach Resort and Conference in February, Nicklaus of Florida, Inc., has purchased two Tampa Bay shopping centers to diversify the firm's portfolio in the area. Colliers International, representing the sellers, announced the transaction this week.

    Sirata Beach Resort and Conference Center, one of Tampa Bay's last family-owned beach hotels, was sold to a Texas-based company, Crescent Real Estate LLC for $108.19 million. [LARA CERRI | Times]
  2. The Mill, independent and chic, looks to find its place amid Brandon's restaurant chains

    Retail

    Elevated cuisine might not be the first image that the Brandon dining scene conjures.

    The Brandon location features a bar with planned happy hour drink specials.
  3. Bucs and Bucks: HBO's Hard Knocks series boosts local businesses

    Business

    TAMPA — Men can enjoy yoga, including the most athletic ones. That is the message that the co-founder of Camp Tampa, a fitness studio located in South Tampa, wants to push after a few Tampa Bay Buccaneers players were shown practicing on HBO's television series Hard Knocks.

    Longtime hairstylist, Katie Ellwood styles Tampa Bay Buccaneers linebacker Kwon Alexander's hair last week at New Identities Hair Studio of Tampa Palms. The camera crew follows Kwon Alexander and other Bucs players during the team's training camp for the HBO show "Hard Knocks," a documentary television series about the ups and downs of an NFL training camp. [Courtesy of New Identities Hair Studio]
  4. Old Time Pottery adds store in Largo

    Business

    LARGO — A home decor and furniture store opened Thursday at 1111 Missouri Ave. N, according to a news release from the Central Pinellas Chamber of Commerce. This is Old Time Pottery's fourth location in the Tampa Bay area, joining stores in Kenneth City, New Port Richey and Brandon. The company, which has 41 …

  5. Tampa Bay has two new million-dollar ZIP Code areas — is yours one of them?

    Real Estate

    You might not be a millionaire, but chances are greater now that you live in a million-dollar Tampa Bay neighborhood.

    Tampa's ZIP Code 33606 is among the six bay area ZIPs in which at  least 10 percent of the homes are worth $1 million or more. This  Davis Islands home sold in January for $6.275 million. {Courtesy of Smith & Associates]