Greek Debt Death Spiral

The fallout from the Greek debt crisis is worsening. The Washington Post notes that stocks across the globe are down as Greek debt woes escalate.

Global stock markets are stumbling as investors worry about fallout from Greece’s deepening debt troubles as talks between the country and its creditors broke down over the weekend.

Greece has shuttered its banks to prevent nervous depositors from pulling their money out, and the country faces a deadline Tuesday to may a big debt payment.

The Dow Jones industrial average fell 213 points, or 1.2 percent, to 17,733 as of 11:45 a.m. Eastern time Monday.

Investors have purchased Greek bonds in the belief that they will make a tidy profit when the debt crisis is resolved. The Euro has not but all that badly hurt as no one really seems to believe that a solution will not be found. But there seems to be a Greek debt death spiral occurring due to the lack of political will in Greece and in the upper echelons of the EU. How will the Greek debt death spiral affect the EU and the Euro?

No Euro Panic, Yet

The Euro is down a bit but as Reuters reports there are few signs of panic regarding Greece.

The euro proved broadly resilient on Monday to Greece’s moving one step closer to an exit from the single currency, helped by intervention by the Swiss National Bank and investors concluding that the situation in Athens still has some way to run.

Greece looks virtually certain to miss a debt repayment to the IMF on Tuesday as the country’s European partners shut the door on extending a credit lifeline after Athens announced a referendum on bailout terms.

But though the euro initially fell sharply in response, to as low as $1.0956, in European trade it was trading within recent ranges at $1.1112 as investors displayed a “complete lack of panic” over Europe’s single currency, as Rabobank senior currency strategist Jane Foley put it.

“If people were questioning the whole coherence of the EMU, then they would want to get out of the euro. The euro’s resilience suggests that people don’t believe that the EMU will fall apart, even if Greece exits,” Foley said, highlighting a move into safe-haven German Bund yields as evidence that investors are not pulling out of European assets completely.

The bottom line is that traders believe a Greek exit from the European monetary union will help and not hurt the common currency. If that is true then the Greek debt death spiral has more to do with Greece than with the EU and Euro.

Is It an Existential Threat?

Bloomberg disagrees and believes that the Euro faces an existential threat in the Greek debt death spiral.

Three years after Mario Draghi pledged to do whatever it took to save the euro, the mounting crisis in Greece is calling into question the integrity of the entire currency union.

While Greece accounts for less than 2 percent of the euro zone’s output, its exit would hurl the bloc into unknown territory by setting a precedent for other nations to reconsider their membership. Mohamed El-Erian, chief economic adviser at Allianz SE, said he sees an 85 percent chance that Greece will be forced out.

While traders do not see an early threat to the Euro in the Greek debt death spiral the problem may lie in the example. If one can leave, so can others!