June 20, 2018
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Big, fat Greek threat

Dimitri Messinis | AP
Dimitri Messinis | AP
Demonstrators run away from tear gas during a demonstration in Athens on Tuesday, June 28, 2011. A general strike disrupted services across Greece and riots erupted once more outside Parliament as demonstrators protested more taxes and spending cuts essential for the country to receive critical bailout funds that will prevent a potentially disastrous default.


As Greece lurches toward a new bailout by European banks, the question remains as to whether the crisis can slop over into the United States.

A narrowly divided Greek parliament has approved an austerity plan with new taxes and spending cuts. The government has been selling off Airbus jets, a post office, two water companies and other assets in a grand tag sale to raise cash to qualify for the bailout.

Demonstrators have been rioting in opposition to the planned cutbacks.

As long as the possibility of the first European sovereign default hangs in the balance, a new world credit crisis can be a likely result, with a heavy impact on the U.S. financial system. The explanation for this threat lies in the recent growth of debt aggregation into investment products that have been snapped up, bought and sold, and swapped by hedge funds and the big banks.

This American vulnerability comes from a complex hodgepodge of mortgage-backed securities, collateralized debt obligations, and so-called structured debt obligations. It dates back to the repeal in 1999 of the Glass-Steagall Act, which drew a line between the bankers and the brokers. President Bill Clinton signed the repeal, joining in a bipartisan misconception that deregulation was a great idea that would spur growth and assure stability.

It did neither. Deregulation gave us a self-governing air travel system, expensive electricity and unreliable telephones. Worst of all, it gave us a financial system based on high-stakes gambling by big banks with their depositors’ money and with packages of consolidated debt. The collapse of bundles of good and bad mortgages triggered the 2008 financial crash.

How the Greek crisis could affect the United States depends on the likelihood that one or more huge American companies may have quietly insured the billions of dollars of European debt and would be overwhelmed by a Greek default. That’s what happened in 2008 to the gigantic American International Group, when a bailout saved it from collapse at a cost of $182 billion to American taxpayers.

A New York Times analysis by Louise Story noted that past financial crises in Argentina and Russia led simply to defaults when those countries couldn’t make good on government debts.

This time, swaps and other contracts may well have spread the Greek risk here. She wrote that spokespersons for the central banks of both Europe and the United States had not studied whether hedge funds and insurance companies are holding contracts involving Greek debt. Chairman Ben S. Bernanke of the U.S. Federal Reserve gave no direct answer to this question but said the effects of a Greek default in the United States “would be quite significant.”

The situation is complex, but one remedy is clear: Restoration of Glass-Steagall or something like it would be a major step toward avoiding these mysterious threats to the American financial system.

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