I know what you’re thinking.
Dental floss bikinis, assassins with silencers, high speed chases through breathtaking mountain passes, and international intrigue.
All true, sans the Berettas, Bugatis and bombshells.
Greece, Italy, Spain and Portugal – Mediterranean countries all – have been in the midst of a financial crisis that is threatening the stability and solvency of the entire Euro Zone.
Although the economic turmoil in Rome, Madrid and Lisbon has started to grab headlines, the fiscal bedlam in Athens has captured center stage on the world financial markets. Through a mixture of incompetence and deceit, the Greeks have allowed their deficit to balloon out of control, putting the credibility of the entire European monetary union at risk.
By American standards, the estimated $70 billion the Greeks need to raise to remain solvent is a paltry sum. But to the credit markets, Greece is beginning to resemble California, and is in peril of being downgraded to deadbeat status.
Retaining their sovereign solvency is nothing new to Greeks.
Even Worse Than Latin Countries
Since the modern Greek state was founded in 1830, the country has, on average, been in sovereign default every other year and has been through five big defaults in less than 200 years. In fiscal terms, Greece has a worse financial record than any comparable developing nation in Latin America or Africa.
Over the past three weeks, uncertainty about the future of the Greek economy has dragged the Euro-currency from its highs near $1.48 to a weekly low of $1.36.
Although the Brits have resisted throwing their hat in with the continentals, they are not immune from the burgeoning problems confronting the Euro Zone. Over the same period, the pound sterling has retreated from $1.64 to approximately $1.55.
The monetary bedlam in Greece along with the rising prospects of defaults in Italy, Spain and Portugal has also spooked investors from Shanghai to Manhattan.
After rallying through the end of 2009, the global stock markets had their deepest sell-off in nearly nine-months. In January alone, the Dow gave up in excess of 400 points.
As Greece slips deeper into the red, aid organizations like the International Monetary Fund (IMF) have been closely watching the situation and voiced their readiness to intervene. Jean-Claude Trichet, President of the European Central Bank (ECB), has desperately been trying to keep this a family affair.
On Thursday, European Union leaders will discuss Greece’s plans to reduce the region’s biggest deficit. In a sign of the urgency that has surrounded the debt plight of Greece and its Mediterranean neighbors, Trichet left a long-planned trade policy meeting to convene an emergency session of European leaders to discuss an aid package for the financially troubled nations. Other prominent members of the European community, like European Commission President Jose Barroso, have been busily beating the drum and touting the bright future of their joint currency.
While no specifics have been provided, the actions by the European leaders temporarily have quelled the world’s financial markets. So far, Wall Street has seen its single biggest rally of the year with the Dow up more than 220 points.
In Order, They Resemble a Greek Circus
In the short run, Spain is relying on history to convince investors it will find an escape route from Europe’s fiscal crisis faster than Greece. As investors start to question Spain’s ability to cut the euro region’s third largest budget deficit, the country’s Deputy Finance Minister, Jose Manuel Campa, publicly assured investors that “we have done it in the past.”
In the early 2000s, Spain turned a shortfall into a surplus within six years of joining the euro. In contrast, when Greece squeezed into the bloc in 2001, the country immediately let its deficit swell back beyond E.U. restrictions. It never has brought its budget back within the conditional limits set by the European trading pact.
Despite their history of political mayhem, leaders in Rome and Lisbon appear to have a slightly better handle on managing their budget woes. The Italians have been aided by the slow but steady upswing of their manufacturing sector, while rumors have abounded that the Portuguese have begun to cut quiet deals with their bankers.
Whatever the outcome, the recession has exposed the real Achilles heel of the European Union. The Europeans may have established a unified currency and potentially potent trading bloc. But when it comes to squaring its fiscal and trade policies with the internal politics of its individual member states, the E.U. still is as chaotic as a Greek circus.
John Cohn is a senior partner in the Globe West Financial Group based in West Los Angeles. He may be contacted at www.globewestfinancial.com
