June 17th, 2011
08:38 AM GMT
(CNN) – From Hong Kong to New York, investors are watching the events unfold in Greece with a dreaded sense of déjà vu.
The reality gap looming in Athens between what ordinary Greeks want and what their politicians can realistically achieve has ramifications that could ripple far beyond the Aegean shores.
The only thing that is certain for now is that the longer the impasse lasts, the more devastating its consequences will be – not just for Greece- but for other cash strapped countries that share the euro as well as Europe’s trading partners further afield.
As the IMF prepares to hand out yet another eye-watering chunk of bailout funds to Greece, it may appear to some like a parent handing cash to a spoiled child - even if they haven’t done their homework.
However the Greeks protesting from the Parthenon to the Parliament this week are not children. They are men and women coping with the most precipitous decline in living standards their generation has known.
Like their fellow bailout recipients in Portugal, their parents remember life under dictatorships and military rule until the mid 1970s. They have fought hard to gain their rights. As such, it’s not hard to see why they are loath to surrender them.
But what many Greeks have come to see as basic entitlements are now deemed a luxury, according to those footing the bill for the country's fiscal excesses. Whether Greeks, like it or not, their nation has been backed into a corner by profligate governments and jittery bond markets.
That corner is only shrinking by the day, thanks to the Greeks' resistance to painful but necessary belt-tightening.
Greece is no longer just the sick man of Europe, it’s the sick man of the world, and a country whose sovereign debt now holds the dubious title of being the lowest-rated on the planet by Standard & Poor's.
Just months ago “default” seemed almost a dirty word, nearly whispered by economists rather than openly discussed. But this week Deutsche Bank strategist Jim Reid went one step further, comparing Greece’s economic limbo to the decline of Lehman Brothers days before the U.S. giant failed.
“We believe the period is resembling the build-up to the Lehman collapse where, although the market was nervous, virtually everyone expected a last minute buyer,” Reid wrote in a note to clients.
“It’s difficult to continually kick the can down the road when the can is breaking up in front of your boot.”
Greece’s financial mess matters far beyond its borders for various reasons. It threatens to undermine the stability of a major trading currency shared by 16 other EU members. It risks limiting larger European countries like Spain and Italy’s ability to borrow affordably in the bond markets.
What’s more: a Greek default could take a bite out of the balance sheets of some of Europe’s largest banks, which have invested heavily in the country’s risky, yet high-yielding debts. Lenders in Europe are still trying to shore up their capital three years after the onset of the credit crunch.
The Greek knock-on effect could hit the fast-growing economies in Asia. “Greece itself is not terribly big in the big scheme of things but what worries people is the uncertainty with a default that could spread through the global financial system,” Frederic Neumann, senior Asian economist for HSBC, told CNN.com’s Kevin Voigt.
“After the credit crisis, we know how interconnected the global financial system is … are we looking at a re-run of the credit crisis, triggered not by a bank but by a sovereign debt default? That’s the fear right now,” Neumann said.
Asian central banks and businesses are worried, too, that a default could spark a slowdown in the European Union. “Europe is a bigger export market for Asia than the United States, which is something people often forget,” Neumann said.
Greece's debt is expected to account for over 150% of its gross domestic product this year. And just like failing to zero that credit card bill at the end of the month, with double-digit interest to pay, the amount owed isn't going to get any smaller.
As of next month Greece is scheduled to start paying back its borrowings – €123 billion of which will mature between now and 2014. Record euro-area yields of over 28% on its bonds mean that issuing fresh obligations on the open markets to refinance its existing debt is no longer an option open to Greece.
This means that if it does not secure cash from the IMF, the EU and the ECB – the so called “Troika” – the country will soon default.
So while the pain of cuts is evident in the violent protests in Greece, the stakes are high for the rest of the world, too. Just as the fall of Lehman Brothers triggered a much larger financial crisis, market watchers are worried that Greece may only be the first domino to fall.
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