The Greek Debt Crisis and the Global Markets

A more technical look at the markets from InterTrader.

If you have switched on your television recently, you may have seen scenes of ordinary Greek citizens protesting in the streets against the austerity measures imposed on them as a result of the Greek financial crisis.

The government of George Papandreou is fighting for its survival and the finance minister has already lost his job. It seems ever more likely that Greece will default on its debt; if not now, then at some stage or other in the not too distant future.

The Greek Debt Crisis

The country is caught up in a downward spiral of a shrinking economy resulting in lower government income. This means the government has less money to stimulate the economy and to pay its debts, which in turn leads to further erosion of confidence and a new round of economic contraction.

Greek government bonds have been downgraded to ‘junk status’. This is a further blow to the debt-stricken country that will make it even harder for the government to obtain finance on the open market for years to come.

Despite German Angela Merkel and French Sarkozy promising “lasting, global and quick responses before the end of the month” fears of a Greek default are causing havoc on European and global spread betting markets.

The European Union, the European Central Bank, and the IMF are currently locked in negotiations on whether to release the latest instalment of the €110 billion rescue package approved for Greece 17 months ago.

European Commission President Jose Manuel Barroso meanwhile warned of ‘unforeseen consequences’ in the event that Greece should default on its debt repayments.

The Greek Debt Crisis: Solutions?

One potential solution to solve the Greek debt crisis is to allow Greece to default, be declared bankrupt, and leave the EU.

The EU, however, seems convinced that this option would not be the best for all concerned. It no doubt fears that such a move could be the beginning of the end for the EU and the Euro, with countries such as Italy and Spain eventually going the same way.

The French and German proposal is that banks should be recapitalised to restore confidence in the European banking system. They do, however, not agree on how this should be done.

Germany wants the banks to first try and find new investors on their own, while France, perhaps a bit more realistically, wants to use EU funds for this purpose.

The Greek Debt Crisis and the Global Spread Betting Markets

The biggest problem with the Greek debt crisis is not simply its effect on the Greek economy. A Greek default would cause havoc in the European banking system and the ripple effect might be so enormous that we could well see a new worldwide banking crisis.

There are several reasons for this: in the first place, Greece owes countries such as Spain, France, and Italy a lot of money. Fear of a Greek default has already caused the credit ratings of several major banks in these countries to be downgraded.

In addition, the inter-connectedness of the world economy would also mean that, if this should happen, the crisis might well spread to other European countries and eventually around the world.

It would mean that countries with high debt ratios could find it nearly impossible to obtain financing on the bond markets for many years to come, effectively stifling economic development in most of these countries.


Good luck and happy trading

Shai Heffetz, InterTrader

(Original article written 10 October 2011).

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