This is an excellent question and one that I have heard all week. Greece is almost half way around the world…it is a relatively small economy…comparatively speaking we don’t trade much with Greece…Isn’t it Greece’s problem?
Perhaps a simple photo will illustrate the issue here. As a kid, I loved to play dominoes with my grandmother. In my version of dominoes, we stood them on end very close to one another – one at a time – until we had placed every domino from the box in such a way where if you tipped the last one, a sequence would occur where every domino fell as a result. It took far longer to set this “game” up than it did to see it call come down.
Greece is a small country thousands of miles around the world with which we do a small amount of business (comparatively). Portugal is closer to Greece and together they do a larger portion of business. Spain is a more robust economy with dealings in Portugal and Greece.
As governments, each of these countries probably owns Greek bonds and other Greek investments. Banks in each of these nations have loaned money to Greece, both to the government and businesses in all likelihood. If Greece defaults on the amount of money that it owes, these two nations and their banks suffer a loss.
Banks all over the world are already doing a high wire act to enable their institutions to survive. Add in a default by the Greek government, and it triggers a default by several banks (for example in Portugal), followed by a default by Portugal’s government, which leads to trouble for Spain’s banks, followed by trouble for the Spanish Government, followed by Germany and France, followed ultimately at some point by the United States. The U.S. stock markets were contemplating this game of 20 unit: domino qq pkv last week, when drops of 10% and more occurred.
But today U.S. Market trading is up markedly. What happened?
Over the weekend, the European Union and the International Monetary Fund (which the United States is the largest shareholder and financial backer of last resort) promised to fund a bailout of these weak European Nations so that the game of dominoes doesn’t take place and destroy the entire world wide financial system.
In essence what was done was create a fire break – a clearing between the trees that prevents a fire from spreading unabated. The break is intended to bound any fire by making it difficult to encompass additional land. (It is akin to removing three or four dominoes from the line to prevent the entire line from going down while it is being built).