(By Deutsche Welle) Limited private sector exposure and massive public sector intervention means little risk of financial contagion spreading from Greece. But there is one area of uncertainty: European politics, says DW’s Spencer Kimball.
Financial contagion is normally preceded by a surprise.
Take the 2008 Wall Street meltdown as an example. The US housing market had experienced a boom. Seeking to profit from the bonanza, private financial institutions the world over purchased securities issued by the mortgage lenders Fannie Mae and Freddie Mac.
Fannie and Freddie are government-sponsored enterprises. As a consequence, investors implicitly assumed that securities issued by the two mortgage lenders were backed by Uncle Sam. But their assumption was wrong, at least initially.
Fannie and Freddie’s securities did not have the same backing as US Treasury bills and when the boom went bust, financial institutions were exposed to more risk than they had anticipated. As the crisis spread through the US and global financial systems, the federal government was ultimately forced to intervene and bail out Fannie and Freddie.
“Financial institutions had wildly underestimated the riskiness of these assets, which made for really fast and furious contagion,” Carmen Reinhart, an economist who researches financial contagion at Harvard’s Kennedy School of Government, told DW.
(By Deutsche Welle) US markets will likely face little long-term fallout if Greece defaults on its debt. Policymakers in Washington are more concerned about the security implications of Greece exiting the eurozone. Spencer Kimball reports.
US President Barack Obama has been making phone calls. In conversations with his French and German counterparts, the president emphasized the importance of keeping Greece in the eurozone.
By most accounts, the US will not face a serious economic blow back if Greece defaults on its debt obligations this week, though the Dow Jones Industrial did drop by two percent on Monday, its biggest decline in two years.
US-based fund managers like Axel Merk actually believe that a default could serve as a healthy wake-up call to complacent investors, who’ve been shielded from risk by the intervention of central banks in financial markets over the years.
“This does not mean that if Greece defaults it’s like Lehman brothers in 2008, where there was potential threat of a meltdown of the financial system,” Merk, president of San Francisco-based Merk Investments told DW. “We’re in a very different situation from 2008 or even 2012 in the eurozone.”
(By Deutsche Welle) Once considered the EU’s staunchest supporter, Germany is growing increasingly critical of its indebted neighbors. Buoyed by a strong economy, Berlin is shedding its timid stance and defending its interests.
During the Cold War, Germany felt strongly that its national interests were synonymous with those of a united Europe. Being part of Europe meant Berlin could exercise its sovereignty in the name of peace and reconciliation. But since reunification, political elites have become more willing to defend German interests, even if they conflict with broader EU goals.
“The opinion of the elites regarding Europe has completely changed,” Ulrike Guerot, with the Council on Foreign Relations in Berlin, told Deutsche Welle.
That change has to do with European monetary union and the introduction of a shared currency, the euro. It was a crowning achievement of the once unimaginable reconciliation between diverse nations into a functioning European bloc.
But recently, the global financial crisis has exposed divisions between Europe’s increasingly jealous nation-states. And hopes for a deepening democratic union from Brussels to Bucharest have run up on the rocks of economic hardship.