Reality is apparently beginning to set in for decision makers in that there is now more talk of potential default contagion if Greece ends up defaulting in its debit. Those in power in the eurozone such as Angela Merkel and Christine Lagarde are beginning to take a closer look at recent history and Greece’s initial bailout.
While many Germans don’t seem to have a problem with Greece leaving the eurozone and going back to using its original currency (with devaluation) in an effort to save the euro, such a move would leave a blemish on the face of the initial promises of financial prosperity and security that were used as the initial bait to hook many of the present members of the eurozone.
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It would seem that the EU and the IMF are really caught between multiple rocks and hard places. If Greece ends up leaving the eurozone because either the IMF refuses to bail it out or Greece simply doesn’t want to take it because it doesn’t like the terms and conditions, there are a couple of looming questions that will need to be addressed, and perhaps sooner rather than latter: which eurozone country will be next, followed by how many?
The uncertainty alone is already impacting economies beyond Greece’s borders, so the underreported possibility of other eurozone countries going into default is backed by more than just recent history. On Monday, the Dow was down 350 points. The flames of investor fears were fanned by the announcement that Greece would not be making any payments to the IMF on Tuesday. On that same day but in another country, it seems that some eerie storm clouds have started gathering for potential a tornado of financial trouble. Puerto Rico announced that it was having trouble with repaying all of its debt.
If there’s any notion that these disasters will be limited to that side of the world, that myth got exploded on Tuesday. It’s anticipated that Janet Yellen of the US Central Bank will use the Greek crisis as an excuse to keep US interest rates low. While this is great news for borrowers, keeping rates too low for too long can create bubbles that, when they burst, can cause economic calamities such as the great depression of the 1930s. When the Fed keeps interest rates low for too long, it also has a negative impact on the price of food and other commodities.
It would seem that Greece is presently attempting to stay in the eurozone and keep using the euro as its currency. Presently, there are no provisions in the EU for how a country actually leaves the eurozone. So it will be interesting to see how this new crisis continues to unfold and world leaders decide to resolve it.
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