Greece’s debt woes push rest of EU to financial frustration

September 15th, 2011

It has been more than a year since Greece announced its financial troubles to the world.  Since then Greece’s debt has been exacerbated by the failure to conjure up a sound recovery plan.

The European Union has provided Greece with two bail-out packages to no avail thus far.  Most recently, on Sunday the global market was hit with the news that some of France’s top banks were feeling the heat caused by the exposure to Greek debt.

According to an article in The New York Times, “French government officials braced for possible rating downgrades by Moody’s Investors Service of France’s three largest banks, BNP Paribas, Societe Generale, and Credit Agricole, whose shares were among the biggest losers last week.”

A man walks by a damaged sign of Greece’s Central bank in downtown Athens last week. Greece has received two bail-out packages from the EU, but the Mediterranean country’s debt has yet to recover.

It is important to note that some of the largest banks in Europe, including those in France, hold billions of Euros worth of Greek debt.

Investors did not take this news lightly as a global market meltdown unfolded on Sunday.

The effects were felt in the global market as investors around the world caught the jitters. According to BBC News “London’s FTSE 100 index closed down 0.8 percent, the Dax in Frankfurt fell 0.1 percent and the Cac 40 in Paris ended the day 0.4 percent lower.”  The Wall Street Journal also said “The U.S. stock index hit session lows.”

Germany, being the financially strongest member in the EU, is feeling the pressure to clean up the mess. Although this is true, there is doubt as to Germany’s willingness to help. As other countries in the EU seem to be somewhat complacent, French President Nicolas Sarkozy, was not.

BBC News reported Sarkozy urged cooperation among his fellow European leaders to find a compromise to help stabilize the Greek financial fallout as well as the Euro.

“Without stability, there will be no economic growth in the Eurozone,” he said.

Leroy Brooks, of John Carroll University’s Boler School of Business said, “Greece has been borrowing large amounts of money for years to cover government spending. Poor government tax collecting was a major factor for having to issue lots of debt. This was clearly not sustainable. placing them in the precarious position they are in today.”   Brooks feels the best solution is for Greece to file for bankruptcy and default on their sovereign debt.

Instead, Greece’s prime minister is undertaking stricter austerity measures. It is uncertain how much longer the EU can hold on with this crisis. Default for Greece is almost certain at this point.

The worst-case scenario is financial contagion, a scenario in which small parts of an economy experience financial shocks in a few economic regions and eventually lead to the meltdown of every financial sector.

Yet, this seems unlikely considering other countries in the EU would be able to absorb the shock of Greek default.