Late last year, Dubai caused shock waves across world markets when the corporate face of the emirate requested that it be granted the ability to forgo six months of interest payments. This request resulted in a drop in the Dow Jones Industrial Average by 150 points on November 30th. The crisis was averted, but in the beginning of 2010 another country has rocked world markets. Greece’s financial secrets became public knowledge this month and the world’s reaction was not positive. For the last few years, Greece has been skewing their nation’s financial data in order to obscure the size of their budget deficits. The exposed secret not only affected Greece but also their Eurozone partners.
Greece became a member of the Eurozone in 2001 and this membership is now worsening the country’s already unstable condition. Greece has not been able to ease the financial strain because they are not able to devalue their national currency, the Euro. The world is now watching, waiting for the nation’s next financial decision. The worst-case scenario is that Greece defaults on its three hundred billion dollar estimated debt, effectively plunging the world into a second financial crisis. This option, however, seems highly unlikely. Greece’s European partners have realized the risk of a Greek debt default and have begun writing a pan-European bailout plan, estimated to be worth around twenty-five billion dollars. Greece is cutting public spending in order to decrease their mounting debt, which has yet to be successful.
Though the problems of Greece’s economy are very large, it really is not the overwhelming worry of investors. The Greek debt crisis, just like the Dubai crisis, is illuminating the transparency of the global financial system. The question stands, what nation is next? Could it be countries that borrowed to bail out financial institutions and to fund economic stimulus programs? Fariborz Moshirian states, “Often governments tend to borrow money to stimulate the economy, and in the medium term they end up with sovereign debt crises.” This problem, however, does not apply indefinitely; it typically only occurs in countries with already high budget deficits.
Now we must look to those countries that, before the 2008-2009 global financial crisis, had high government deficits. Could it be Spain, Portugal, Ireland or Italy? No one can predict which country will succumb to economy pressure, but investors around the world have realized the tumultuous situation the global economy is still experiencing.
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