Why Greece matters, despite its small economy

by Michael Tarsala

Greece leaving the euro might not have much of an effect in the U.S. or globally, suggests Jim O’Neill, chairman of Goldman Sachs Asset Management.

After all, Greece and Portugal only make up about 5% of the Euro Zone economy. He said this week in a story that ran in the Vancouver Sun, ”it may not be a big deal if they leave.”

So why are the markets selling off so hard this week on that possibility?

Jamie Coleman, long-time foreign exchange analyst at Forexlive.com cuts to the quick:

What if Greece is just the first domino?

If Greece leaves, who’s next? Ireland? Small country, who cares. Portugal? Ditto. Spain? Wait a minute! Netherlands? Whoa, hold on now…

That’s the problem for the euro. It is only as good as its weakest link, and there are plenty of weak links, at the moment. To mix a metaphor, once the dominoes start falling, there is no telling where (or if) they stop.

Here’s a summary of latest on Greece concerns:

  • Some in the financial markets are now projecting that Greece could leave the euro as soon as next month, including John Taylor of the hedge fund FX Concepts LLC.
  • There may not be a Greek government formed in time to fight for another round of bailout funds in June.
  • Two-thirds of Greek voters rejected austerity. The political will for Greece to accept the austerity needed to continue to get bailout help is now very low.
  • The small fringe parties that took more control in the election won on a protest vote; they lose credibility if they change their minds and and accept more financial reforms.
  • Greece must decide by next week if it will pay about $450 mln in debt that is coming due; that may be the first litmus test of what could happen next.

And if Greece does leaves the Euro:

  • Runs on Greek banks are possible.
  • Banks in Europe and elsewhere that hold a large amount of Greek debt could take a hit.
  • Foreign companies that do business in Greece may run the risk of not being paid.
  • Hyper-inflation could take hold.
  • There could be more buying of U.S. treasuries and more of a risk-off stance by global investors.

It is bad enough with so many potential negatives hanging over any one country.

As Coleman says, however, what happens next matters beyond just Greece.