You're trying to please your boss, appease the kids, pay off the mortgage - in short you have a life - and here are all these ominous sounding stories about Greek debt. Today, much of Greece is at a standstill because the unions don't think much of the austerity plans being put in place. Of course, when your bills are projected to add up to around 150 percent of your gross domestic product, austerity would seem to be the first order of business. Thing is, more and more speculators, many of them banks and hedge funds, are betting against Greece through those dastardly credit-default swaps. "It's like buying fire insurance on your neighbor's house -- you create an incentive to burn down the house," analyst Philip Gisdakis tells the NYT.
A little-known company backed by Goldman, JP Morgan Chase and about a dozen other banks had created an index that enabled market players to bet on whether Greece and other European nations would go bust. Last September, the company, the Markit Group of London, introduced the iTraxx SovX Western Europe index, which is based on such swaps and let traders gamble on Greece shortly before the crisis. Such derivatives have assumed an outsize role in Europe's debt crisis, as traders focus on their daily gyrations.As a result, some traders say, is a vicious circle. As banks and others rush into these swaps, the cost of insuring Greece's debt rises. Alarmed by that bearish signal, bond investors then shun Greek bonds, making it harder for the country to borrow. That, in turn, adds to the anxiety -- and the whole thing starts over again.
As you might expect, there's a lot of finger-pointing and all kinds of deferral tactics. But getting back to our headline: Must we worry about this? The short answer is probably not. A lot of messy stuff would have to happen for the debt contagion to spread this far. But that doesn't mean it's not possible, and after all that has happened these past couple of years, you never say never. The Washington Post summarizes:
The fear among some analysts is that just as subprime mortgage loans -- representing a minuscule portion of the global financial landscape -- triggered a massive crisis back in 2007, so could Greece cause problems for much bigger, and apparently more stable, nations around the world. One of the lessons of the global financial meltdown is that crises tend to evolve in unpredictable ways. That was also the experience in the late 1990s, when market concerns about Thailand's foreign debt led investors to question the finances of several other East Asian nations, resulting in the Asian financial crisis of 1997-98.
Such contagion has not yet spread from Greece, and forecasters generally view this prospect as a "tail risk" -- a danger that's unlikely to arise but that would be nasty if it did. Financial market participants seem confident that Greece's problems will be confined to Greece and perhaps a few other European nations with particularly ugly public finances.
Photo: Striking in Greece/AFP/Getty Images