In a reprise of the 2008 crisis, Greece’s toxic bonds are tangled in a web of debt and complex derivates such as credit default swaps (essentially, insurance on debt) that could ensnare banks and financial institutions far and wide. The difference this time around, however, is that Europe — which lacks strong central institutions like the US Federal Reserve — is less well-equipped to untangle the mess quickly, explains Connelly.
So while Greece’s bonds will be paid this summer, there are many billions of dollars worth of debt that remain outstanding over the next several years. Greece stands almost no chance of being able to pay these in full, and if economists are right, austerity will only worsen matters by crippling the country’s economy. So if Europe balks at rescuing its errant Mediterranean partner, or if it fails to come up with an orderly plan enabling Greece to default, everyone stands to lose. And because American financial institutions are intricately tied in with Europe, the pain would be felt on this side of the ocean as well.
Stay tuned, this Greek drama is not over yet.