If Greece Defaults. . .

by Jack Lee,

UPDATE: President Obama…”We congratulate the Greek people on conducting their election in this difficult time,” the White House said in a statement. “We hope this election will lead quickly to the formation of a new government that can make timely progress on the economic challenges facing the Greek people.”

The dire economic events unfolding in Greece may be thousands of miles removed from our shores, but we’re still inextricably linked to the outcome. The reasons are summarized in the following paragraphs. But, keep in mind, these are a consensus of opinions from many top political and economic advisers, this is not just blog talk:

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If Greece is not able to comply with the G-20 demands it’s certain they’re headed into a financial meltdown. This could trigger many untoward events, such as starting a major credit crisis, triggering inflation and ultimately adding to record unemployment numbers that will delay recovery from the Great Recession.

Greece has been on a disaster course for many years, long before the symptoms were obvious and when the bubble burst, it surprised only the Greeks. They had been living very high on credit and denial. They thought, we’ve been doing so well (living on credit cards), how could the bottom fall out and so suddenly? They borrowed from year to year like a big Ponzi scheme, adding to the national debt just like we do, and finally it was too much and it’s imploded.

Last year the Greeks were looking at over $90B in cuts, this year when the G-20 is done crafting a bailout plan, it will likely be much more.

Greece has a relatively small GNP and the sudden and massive cuts to their lavish safety nets coupled to the loss of tens of thousands of good paying civil service jobs is in a word… devastating. I’m not sure we can truly understand how much stress this is causing them, but imagine us in a depression and maybe you can come pretty close.

Greek Election: It was a minor miracle that a thin majority of the citizens are still backing the reformers after this last June election. This has sparked some hope that the Greeks are willing to comply with the G-20 demands.

Bailout Comes With Big Strings: Despite the previous bailout money from Euro bankers and the USA, if the new modified debt restructuring isn’t implemented quickly Greece will be leaving the Common Market with their pockets turned inside out, by choice or by default. Britain’s PM, David Cameron, said during his flight to Mexico City for the G-20 summit, “If Greece “wants to stay in the Eurozone then the country’s politicians have got to get on with it.”

Credit Rating Drops: According to S&P Greece now has the lowest credit rating possible for any S&P covered country, CCC. This has resulted in their T-bills paying out 7% compared to our benchmark 10 year notes at 1.62%.

The Other Shoe is Dropping: We have other Euro nations near bankruptcy and could pose an even great liability, Spain and Italy are two for example,but there’s more. Let’s just say there are some major economies currently under extreme stress from unsustainable [socialist] practices that have left them financially overdrawn when the big recession hit.

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The Euro dollar is under stress too. Its future depends largely on what the G-20 decides this week. The bailouts and government reform plans are expected to be finalized by the end of this month and there’s a good chance that the German austerity plan will emerge largely intact. This does not bode well for the average Greek citizen.

What does a Greek default mean for the USA? In simple terms, if Greece defaults everyone will feel it. The first thing to happen is their banks will be nationalized and European creditor banks will be hit hard as liquidity dries up. Credit default insurance will be forced to pay out hundreds of billions (like our mortgage insurance) and this will trigger a global credit crunch. If money market funds can’t roll over their paper, that will result in these monetary funds running short and margin calls. This means immediate panic as sudden risk exposure causes investors seek safer havens.

A Greek default could encourage other nations struggling under heavy debt and looking at years of slow, painful recovery to say enough! They join Greece and default. This leaves major global banks unable to meet reserve minimums and more paper is printed by the government and more sovereign debt and nothing to back up the paper. Now were looking at the major European Central Banks going into crisis mode, looking for bailouts and more money is printed. How far away do you think inflation is at that point?

Those solvent nations will be torn between shoring up the timbers of the weaker nations or letting nature take its course. This would likely start a major divide leading to dangerous political chaos. Germans are extremely divided about what to do with at least half the country willing to let Greece and others go under.

The US is heavily invested in Europe and we’ve entangled ourselves in many loan guarantees , bailouts and co-signed for credit. When Greece defaults you can be assured that panic will hit our banks. Investors will run to safety as lending dries up in the second phase of the Great Recession.

In the early stages of a Greek default we can count on our overseas trading partners suddenly not buying much of our exports and that will ultimately impact our balance of trade. China is going to be particularly hard hit if a default cycle starts with Greece and spreads. They buy a lot of US goods and they are also holding hundreds of billions in American debt… fair warning here.

All this is going to send our stock market plunging which is currently precariously propped up as investors desperate for the slightest signs of recovery cause the market to gyrate, just before the plunge. Warning, this part is happening right now.

Economics 101: A recession recovery hinges on one thing… jobs. Anything else just pales by comparison. We currently don’t have the jobs and unemployment has been dragging on too long. However, it’s important to note that we have thousands of unfilled positions for jobs. What that tells us is the companies that do the hiring are bracing for another economic downturn. This is a global phenomena happening right now and a Greek default will play havoc on jobs.

Unemployment and under- employment has brought Greece, Italy, Spain, Portugal, Ireland and others to their knees and now it threatens the new French government who are bent on restoring costly socialized programs.

Currently 10 of the Euro zone countries have unemployment numbers over 9% and it is likely to get worse and at the epicenter of this storm is Greece. Now you know and the next time somebody says they don’t care what happens “over there” because it’s not our problem you can inform the uninformed.