Greece and Europe: A Deck of Cards About to Fold

The plight of Greece is an embarrassment to the EU. Dare the “Big Boys” France and Germany admit that monetary union is a failure? Certainly if Greece still had the drachma the country would have seen a frequently devalued currency over the past year. That somewhat automatic mechanism would have brought high inflation to the population but at some point would have boosted exports and squeezed imports. Unfortunately, the currency mechanism has been severely muted because Greece is only 3% of Euro zone GDP. Probably the best answer to this problem is IMF assistance. But that makes France and Germany look like deadbeats as well.

And even those countries outside the monetary union should be concerned with a Greek or worse yet, a PIIGS default. I pondered the question recently as to who purchased that latest Greek bond issue. What financial institutions outside of Greece own other Greek bond obligations? Yes, of course, there are numerous non-Greek banks that are owed money. According to an article in today’s London Telegraph, the “UK banks are exposed to these countries” (the PIIGS) “to the tune of 16 per cent of gross domestic product.”

What is even more concerning is that not only do French banks have a 30 % GDP exposure to the PIIGS, but that Irish banks have a 34% exposure and Portuguese banks have a 24% exposure. Can we expect the PIIGS to bail out their own banks?.. not very likely