Greece is the country normally known for mythology and coliseums, but for the past year, and probably well in to the future, Greece is making headlines for less mythical reasons. Greece has earned the reputation of being that family member who can't seem to get out of money trouble and, in turn, is always asking for a loan. Also, like that same family member, the chances of getting that money back isn't high.
Federal Reserve Chair Ben Bernanke said in a recent press conference that Greece is a difficult situation. They are on the brink of bankruptcy and many economists believe that they are already bankrupt. Greece's debt has reached 160% of their gross domestic product. When debt reaches 100% of gross domestic product, it is cause for major concern. What's worse, they don't have the capacity to do much about it.
Greece can't artificially change the buying power of their currency because they are part of the eurozone, and they can't easily raise taxes because they don't have an efficient or well-developed system of collecting taxes. If all of that isn't enough, the citizens of Greece are growing increasingly upset with their government, which is causing political turmoil as well as economic. Greece owes so much money to other countries that each citizen owes $40,000!
So if you aren't Greek, why is this important?
We Live in a Global World
New York Times columnist Thomas Friedman has written extensively about the topic of globalization. In his book "The Lexus and the Olive Tree" he speaks of how the world is no longer a collection of countries, many of which have little effect on each other. Because of the large scale innovations in technology over the past 20 years, the world is now completely interconnected. When something happens to one country, the entire globe is affected.
How does Greece directly affect citizens on the other side of the world? Reuters reports that North American banks only have approximately $32.7 billion tied up in Greece but this is where globalization really comes in to play. North American banks may not have a lot of direct exposure to Greece but they do have exposure to European banks as well as countries like Germany who have a lot of money in Greece. If those banks find themselves under severe pressure, so will banks on the other side of the Atlantic.
The Eurozone and the Euro
The eurozone is a collection of 17 countries that all share a common currency and whose monetary policy is governed by the European Central Bank. There is nothing in the treaty that mentions breakup or any procedures for removing a nation, but that's the talk now. With Greece in trouble again and needing a monetary bailout, not all eurozone countries are onboard with loaning the financial black sheep more money. Breakup talks aren't public but the rumors abound. Some believe that the complete breakup of the eurozone is inevitable. Additionally, when a eurozone country comes under pressure, so does their currency - and when a nation's currency is devalued, that further pressures countries like Greece who have to import from other areas.
How does that affect you? When Greece, a country with a little more than half the population of the state of New York, runs in to trouble, it severely disrupts North American financial markets. During the last Greece financial scare, the American stock market saw severe declines. If the eurozone were to fall, the impact to world financial markets could be catastrophic. Of course, not all economists agree that financial Armageddon would emerge, but the effects of a divided eurozone wouldn't be positive, at least in the short term.
Although not directly financial, who can forget about the rich archeological history that is found in Greece? When Egypt's government fell, there was a little reported side effect that has been devastating to the country and the world. With only a loose transitional government, Egypt now lacks the resources to protect their valuable artifacts from looters, which could spell doom for the rich archeological heritage of the country.
If Greece defaults on their loans and declares bankruptcy, riots are likely to continue and intensify leaving the long-term sustainability of the government in jeopardy. Add to it the fact that a bankrupt country doesn't have the financial resources to protect and maintain their artifacts. This may not be an effect on North American wallets but still an unfortunate side effect of economic turmoil.
The Bottom Line
It's not likely that a eurozone failure will occur in the near future, but Greece is on financial life support and it's more than likely that your money is somehow being affected. While you need to become an expert on Greece, the next time you see it in the news, it may be worth a little more attention.
By http://www.thebull.com.au/ - for more articles like this go to The Bull's website Australia's pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.