Daniel Gross

In the Euro Crisis, Greece is a Sideshow to Spain and Italy

Contrary Indicator

Greece is becoming like one of those celebrities who has to do or say ever more outrageous things to continue to stake a claim on public attention. (Ahem, Mr. Trump.) Having sought two bailouts and convinced many bondholders to take a 75 percent haircut on the value of their holdings, Greece has lately resorted to more extreme measures. Like electing several members of the neo-fascist party Golden Dawn to Parliament, as it did last month. Or perhaps by electing a party to run the government that has threatened to default on its debt entirely, as it may do on Sunday.

But as is the case with celebrities making outrageous statements, Greece's ability to shock the world is declining. And in fact, given the activity elsewhere in the euro zone, the action in Greece is becoming something of a sideshow.

Consider. Holders of Greek bonds have already accepted a three-quarters reduction in the value of their holdings; that means there is only 25 percent to go. A conscious decision by Greece to default on the remainder of its debt and leave the Euro entirely would certainly wreak havoc on the European banks that have lent to Greek private-sector companies. This chart shows Greece's public and private sector had a combined $447 billion in debt outstanding. That's a lot. But the world's financial system could survive the demise of the world's 38th largest economy, one whose output comprises about two percent of the euro zone. The writedown in the value of Greek sovereign debt is already causing Cyprus to seek a bailout. But Cyprus can be easily bailed out by China, Russia, the European Union or a generous billionaire. The European Central Bank, which holds a fair amount of Greek debt, can always print money to make up for the losses on its holdings.

Analysts fret that a Greek default and exit would set a bad precedent. Won't countries with unbearable debt loads, like Ireland and Spain, simply default and leave the currency rather than pay them? But there's good reason to doubt a domino theory. Few countries have the toxic mix of a paralyzed political culture, financial mismanagement, corruption and a fundamental inability to collect taxes that Greece possesses.

What's more, unlike Italy and Spain, the current subjects of the bond markets' ire, Greece is sufficiently small that it can fail without great consequence. The flipside of 'too big to fail,' is 'too small to matter.' In the U.S., hundreds of small banks failed without taxing the FDIC deposit insurance fund or threatening the system, but behemoths like Citigroup and Bank of America had to be saved at all costs. In today's world, whether you're a company, a business, or a government, you can only go bust if those to whom you owe money can afford it. The world has gotten to a point where it can afford to let Greece go completely tapioca, even if it doesn't like the consequences. But the same can never be said for Spain and Italy, the 10th and 13th largest economies in the world, respectively.

Spain's banks are getting more credit, when they really need more capital. Growth is the best cure for a deep recession and a large debt burden. But Spain, which sports a 24 percent unemployment rate, a shrinking economy and a recent history of woefully underestimating the depth of its problems, doesn't show many signs of being able to do so. Meanwhile, investors are now questioning whether Italy — a country with a large debt load and a long history of slow growth — can afford to continually roll over its debt when investors force it to pay well over 6 percent for 10-year bonds.

So as the drama of the Greek elections unfolds over the next few days, and as headline writers unfurl puns about Greek tragedies, the Grexit, and the drachma, let's not lose sight of the bigger stories unfolding across around the Mediterranean.

Daniel Gross is economics editor at Yahoo! Finance.

Follow him on Twitter @grossdm; email him at grossdaniel11@yahoo.com.

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