Why the Greek Crisis is Everyone's Problem

Greek debt, German banks and your 401(k) are all connected. And there's no way to rescue only the innocent.

My latest column for The Week examines the problems Greece's financial crisis is creating for the rest of the world.

Over the coming months and years, Greeks will pay more in taxes, receive less in benefits and balance their books. From the perspective of a country with 3,000 years of history, half a dozen years of austerity is not an impossible difficulty to overcome.

Even in the worst case – default – Greece will recover. But not Greece’s creditors. They can be wrecked just by a few late payments.

Der Spiegel estimates German banks’ exposure to Greece at 30 billion euros. Add the German banks’ other wobbly European borrowers – Portugal, Ireland, Italy and Spain – and the total bulges to more than 500 billion euros, or about one-fifth of German GDP.

If those loans go even temporarily into default, German banks lose their ability to pay their own creditors: depositors, bondholders, others. Thus if Greece sneezes, it is Germany that catches pneumonia.

And that is why Wall Street – and your own 401(k) – crashed in sympathy last month. If German banks go illiquid or insolvent, German credit markets freeze. If German credit markets freeze, German purchases of American goods and services shrink - or collapse. And the portfolios of banks in other locales become suspect.

Click here to read the rest.