Greek Debt Crisis Begets Euro Crisis. How Much Is It Fear Driven?

Article excerpt

The fear of contagion from the debt crisis in Greece may have helped create the reality of it in financial markets.

Here's a question that economic historians will ponder soon enough: Which came first during the Greek debt crisis of 2010 - the fear of contagion in global markets or the contagion itself?

The answer could help prevent the domino effects of another financial knockdown in the future. As it is, leaders in European Union (EU) are still trying to figure out how to slow the tsunami- style damage to stock markets from Greece having come close to not paying its debts because of overspending.

"It's absolutely essential to contain the bush fire in Greece so that it will not become a forest fire," said Olli Rehn, European monetary affairs commissioner.

A $140 billion, three-year rescue plan for Greece may be only the first step in preventing other fiscal weaklings in the 16-nation eurozone, such as Portugal, from going the same route as Athens in being forced into sudden austerity. Leaders often must stem investor fears by pouring more and more money into shattered markets to restore certainty and credibility.

The term contagion has been thrown around so loosely since Greece's debt woes became known that its use may have helped make it more of a reality. In fact, economists who study the viral effects of financial woes have a phrase - "pure contagion." It describes a situation in which a crisis triggered in one country appears unwarranted because the economy's fundamentals are still sound. …