The drama over Greece's bailout comes to a head this week. Debt holders have until Thursday to accept or reject the "voluntary" 53.3% haircut on their Greek holdings. If less than 75% of bondholders reject the terms, Greece will be considered in default, which would be the first sovereign default in the eurozone.
A "disorderly" default by Greece could cost the global economy about $1.3 trillion, according to the International Institute of Finance. Fear over just such an outcome, as well as more weak economic data from Europe, put sharp downward pressure on global stocks Tuesday.
Overnight, Hong Kong's Hang Seng fell more than 2% while major bourses in Germany and France were down over 2.3% in recent trading. At the U.S. open, the Dow fell over 100 points.
The good news, for financial markets, is the European Central Bank has already extended over $1.3 trillion in loans to EU banks via two rounds of its long-term refinancing operation (LTRO). The ECB's aggressive actions have helped stabilize the banking system and make it far less-vulnerable to a Greek default, which market players have had eons to prepare for, anyway.
"Let us make no mistake, without ECB largesse, European banks would have either to sell equity at fire-sale prices or their governments would have to nationalize them," writes John Mauldin of Millennium Wave Advisors. "Otherwise they would be insolvent and that would in all likelihood mean a credit crisis worse than 2008."
Avoid another credit crisis is certainly a good thing. "We should applaud every time they spend more money [in Europe] because that keeps a credit crisis from spreading to our shores," Mauldin quips.
However, there are "unintended consequences" to the ECB's rescue efforts, he says, as we discuss in the accompanying video.
In a nutshell, Mauldin believes the ECB's efforts to keep the eurozone together "may have made it easier for it to break up in the future."
The original Greek bailout, he explains, was really a bailout of German and French banks. Now that the ECB has helped those banks offload their holdings of Greek debt -- as well as Europe's other PIIGS -- there will be less appetite for future rescues.
At the same time the ECB is taking bad debts off the banks' hands, an rising percentage of the sovereign debt of say, Spain, is being held by Spanish institutions, he notes; the same is true of Italy, Portugal and all other EU members, for that matter.
"When you have a crisis and austerity measures aren't working...it'll be easier for those countries to exit [the euro] because there won't be as much of that debt on other European banks' books," he says.
In other words, the ECB's efforts to keep the eurozone together may be sewing the seeds of its ultimate disintegration. Beware the law of unintended consequences, indeed.