October 3, 2011 (Chinavestor) Investors in the U.S. and as a matter of fact all around the globe are confused about what impact Greece can have on the global economy. Greece's GDP is a $318 billion, just a small fraction of that of greater Europe. Yet European stocks are hostage of Greece's debt problems and have fallen over 70% since 2010.
Here is what's behind the scenes. If Greece were to exit the Eurozone, that would not only leave French and Germans banks settled with deep losses, but would also encourage Ireland and Portugal to do just that. Both these counties are mired in debt and are just a notch above Greece in credit rating. Having escaped from confinement, the genie will not return. Now, if Ireland and Portugal were to exit, what would encourage Spain and Italy, the third largest economy in Europe, to follow suit. The economic disintegration of Europe would send shock waves throughout the already nervous investor community.
The good news is that european politicians and monetary decision makers are fully aware of the downside risk Greece represents. Should they come up with an orderly plan for Greece to exit the Eurozone WITHOUT encouraging other members to follow suit, one big hurdle would be solved.
High unemplyment and lack of economic growth will remain issues globally, except for South-East Asia. But let's just tackle one problem at a time and hope for a resolution of Greece's problems soon.