The New York Times reported on Tuesday on the perilous position of Greece as it stands on the precipice of financial disaster. A major ratings agency, Standard & Poor’s, downgraded Greece’s debt to junk level, resulting in a massive nosedive in stock indices across the continent as the euro plunged in value, now hovering at a dismal 13% decline against the dollar since December. Repercussions also made it across the pond as the Dow Jones took a 1.9% hit by the end of the day. With shockwaves from the impending collapse growing increasingly more far-reaching, world leaders are struggling to minimize the ramifications of this modern Greek tragedy.
European leaders within the EU are particularly fearful of the consequences of such a collapse, particularly with looming problems in Spain and Portugal, whose national account ledgers display so much red the situation should be called the Red Scare. As debts continue to mount on the Iberian Peninsula, Greek financial woes seem like the latest addition to a brewing perfect storm. The EU seems most concerned about the economic ripple effect that is sure to come, a fear that is not unfounded given the current plummet in value of the euro. As the Greek drama unfolds, political tensions with Europe are highlighted, namely a co-dependence on France and Germany within the euro zone, who are expected to contribute a large portion of the assistance package. Nations like Greece, Spain, and Portugal cut back from their economies in the face of debt, which reduces revenue, leaving them plunging further into the red. At this point, Greece’s debt relative to its GDP is 120%, but it cannot manipulate monetary policy to alleviate some of the decline due to the regulations of the euro zone. Here it seems evident that a major flaw in the EU is revealed as leaders scramble to save their nations from the damaging effects of yet another European financial collapse, only a year and a half after a similar ordeal in Iceland.
A major assumption on the part of many analysts is that the US should get involved, however the EU has specifically asked that the US stand aside to allow European leaders to address the crisis. It seems likely, though, that the US has no choice but to become involved. The Greeks are incredibly vulnerable at this point, forced to accept significant amounts of aide from international organizations in which the US plays a major role. American banks, primarily Goldman Sachs, are also partially to blame for the collapse. Goldman Sachs helped the Greeks legally hide the extent of its debt in order to retain membership in the euro zone while collecting hundreds of millions of dollars in fee as the struggling state sank further towards financial ruin. This relationship was made all the more ironic as senate hearings for Goldman execs continued this week. As the situation in Greek worsens, the US must realize that action is necessary, but only under the leadership of the European Union. In the meantime, don’t expect Goldman Sachs executives to summer in Athens any time soon.
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