It’s spring, the birds are chirping, the weather is getting warmer, and for the third year in a row the European worry machine is kicking into full gear. Yes, Spain has been a quiet thorn for most of the year, but it’s somewhat depressing to believe that Greece has resurfaced as the poster child for European political dysfunction. Last year markets worried about disorderly default, and this year they worry about Greece leaving the Euro. Not surprisingly, some recent investment discussions have returned to the Greek crisis, and what it means to world markets and portfolio allocations.
In terms of size, Greece is not a big part of the world economy – heck, it’s less than 3% of the Eurozone. But over the last two years this tiny country has been helping to roil world markets. For investors, the major fear regarding a Greek exit from the Eurozone comes in the form of system risk, and the reality that no one really knows how a potential defection of a Eurozone member will affect the word financial system. There are legitimate questions to ponder: Will the Eurozone be able to wall off the European banking system? Some estimates say global financial institutions have about 420 billion euros in exposure, which seems quite benign when considering the size of previous bailouts in the region. But perhaps a bigger concern is the possible exposure (of unknown magnitude) that could be hiding in derivatives. If Greece leaves, can the European Troika manage an exit in a somewhat orderly fashion, or will a cascading series of bank runs unfold in different countries and infect the entire globe? Last, if one country leaves, will other countries decide to follow, potentially splintering the entire Euro project? These are legitimate questions and risks, and no one will deny that some of the risks associated with Greece are unquantifiable at this time.
But there’s a part of me that believes the current media coverage is off balance and is feeding the fear about what will happen if Greece actually leaves the Euro. Isn’t there a potentially positive side to a Greece defection? I haven’t heard many commentators talk about the fact that the world seemed to manage with drachmas, pesetas, lira and deutsche marks long before the Euro Common Currency was ever adopted, but somehow it did. Economic common sense would suggest that it might actually be a good thing for each country to control its own monetary and currency mechanisms. There’s a chance that things might heal faster for parts of the European periphery if they could just devalue their currencies to try and stimulate their economies, rather than continue to be strangled by a currency and monetary policy that is really only good for Germany and France. Lastly, maybe someone could entertain the idea that if Greece defects, that doesn’t necessarily mean that Armageddon will unfold in world financial markets. What if Greece leaves the Euro and life goes on? If the worst doesn’t come quickly to fruition, maybe markets would show signs of relief that tiny Greece was finally removed from the wall of worry?
No doubt there are legitimate risks to consider, but the fear is being exacerbated by overly negative headlines hitting us 24/7. No doubt we’ll be talking about Greece in coming days, and when we do it we’ll be careful to separate the facts and legitimate risks from the media negativism that surrounds us.