Greek debt is Europe's biggest worry

As far as economic risk goes the biggest story right now concerns the European sovereign debt crisis. Probably the biggest risk facing European banks and governments at present is Greece.

Years and years of profligacy have left the Greek state with staggering debt (roughly €357bn as of October). The problem is so big it is threatening the very survival of Europe’s common currency.

There’s absolutely no way that Greece can pay back that debt on its own it’s simply too large, according to several analysts.  

This has prompted other European countries, spearheaded by Germany and France, to throw Greece a lifeline. Currently this is in the form of an EU bailout fund totalling €780bn.

But even that might not be enough. Risk analysts at Stratfor, a US intelligence company, think that Europe needs to stump up at least €2 trillion of cash to sort the problem out. The €2 trillion fund would pay for three things simultaneously, says Stratfor.

Europe needs to stump up at least €2 trillion of cash to sort the problem out

First, roughly €400bn is needed to create a “fire-break” to separate Greece from the rest of Europe. About €800bn is also needed to prevent a widespread banking meltdown once Greece is booted out of the Eurozone (bankrupting it by definition). Finally, the fund would pay for another €800bn to bailout Italy, the state that is in the most danger of falling after Greece.

Without this massive safety fund there’s no way that Europe’s leaders can kick Greece out, says Stratfor. But it’s tricky to see how European statesmen, particularly in the rich north, are going to be able to convince their voters to stump up all of this cash, preoccupied as they are with their own national interests.

A lack of strong cross-border leadership is one of the reasons for all of the delays, confusion and uncertainty around the Greek crisis.

Meanwhile Europe’s biggest banks, including Commerzbank and Deutsche Bank, are showing worrying signs that they’d like to see the Greek rescue package killed.

Deutsche Bank’s chief Josef Ackermann said recently that new plans to have banks take a greater burden of the aid package (by having them write off old debts) would cripple the industry just as it is needed most as a pillar of stability in the region.

The price of rescue is cheaper than the price of failure.

Germany’s second biggest bank, Commerzbank, and others, also warned that France’s and Germany’s impeccable AAA credit rating could be downgraded as a result of their support for the Greek economy.  

It appears that some bankers would risk a severe regional financial crisis to keep them from bearing the brunt of the costs now. But as Exclusive Analysis points out: “The price of rescue is cheaper than the price of failure.” A controlled, orderly default, with banks and governments both paying the price, is the only option for Greece.

As the streets of Athens have borne witness to in the last few months, the economies of southern Europe face enormous social problems as well as financial ones. A broken economy also threatens a breakdown in civil order.