The first thing to know about the Greece story is that it’s not really about Greece.
Not, at least, in the big financial picture, where the country’s measly $242 billion economy is only a shade larger than Connecticut’s, and where its debt, the equivalent of $360 billion, would be a rounding error of the nearly $18 trillion in U.S. obligations.
Why Greece and its likely debt default and possible exit from the euro zone matters is as a symbol—of how far the global community will go towards rescuing Greece from its debts, and ultimately, perhaps, for whether similarly debt-laden weak sisters in the euro zone should simply leave the union, go back to their original currencies, and inflate their way out of trouble.
For U.S. investors, then, the dollars and cents aren’t particularly compelling, but the longer-term ramifications could be more meaningful.
“You always want to think about any volatility that could be created by a default,” Quincy Krosby, market strategist at Prudential Financial, said in an interview. “It’s one thing to say it’s ‘contained,’ but investors heard that subprime was contained, too.”
Indeed, the contagion risks, like those posed by the subprime mortgage meltdown in the previous decade, are at the heart of the Greek melodrama.
Default is the simplest way out of the crisis from a financial standpoint, but the ramifications could be substantial.
“If Greece were a company and it had creditors, there would be a default,” Krosby said. “But it’s not a company, it’s a country, and even though as a country that’s very small … the fact of the matter is geopolitically it plays an important role.”
Thus, developments in the negotiations between Greece and European authorities move markets in the U.S. and abroad. Monday’s stock market rally, in which pretty much every major index in the world outside of Israel and New Zealand was higher, came on renewed hopes that talks would bring about an accord that would give Greece more time to pay its debts.
Never mind that the long-term prospects for the state to satisfy its creditors remain dubious, the markets are willing to buy into the extend-and-pretend scenario.
Charlie Bilello, director of research at Pension Partners, summed up the situation neatly in a tweet:
“The problem is the euro leaving Greece, not Greece leaving the euro.” Credit Suisse analysts said in a note to clients.
Should the two sides fail to reach a deal and money start fleeing Greece, that presents the possibility of a fiscal nuclear option—”capital controls,” or a government-enforced mandate that would prevent outflows. Credit Suisse estimates the move would be a net negative for the economy, but one that nevertheless could help provide some stability amid the expected chaos that would ensue.
“A failed outcome in Greece would also have negative implications for the rest of the euro area,” Credit Suisse added. “For us, the risk of contagion would be more prevalent through the banking system than through sovereign debt. But it’s important to be humble: there may be unanticipated or underappreciated channels of contagion and risk that could prove surprisingly powerful.”
Consider, then, the ensuing period of deals and nondeals, news of breakdowns and rumors of break-ups, to be more of the financial kabuki theater that has permeated the euro debt crisis.
Until, that is, something actually happens.
“A compromise from both sides is in everyone’s best interest—for the EU, this is not about economics or finance as much as geopolitics, which was always what the entire monetary union was about to begin with,” David Rosenberg, senior economist and strategist at Gluskin Sheff, said in his daily commentary Monday.
“For the EU leadership, it is critical that a precedent is not set for the rest of the monetary union membership,” he added. “There are simply too many incentives to get an agreement cobbled together to think it won’t get done. The Europeans have refined brinkmanship and made it into an art form, and that is how the markets are appropriately treating the situation.”