SIEGEL: With Greece in political and economic turmoil, the question in financial markets is what effect will it have on the rest of the world. As we mentioned, Eurozone countries helped fund a previous rescue package for Greece. And French and German banks are highly exposed to potential losses there.

As NPR's Yuki Noguchi reports, that has investors here in the U.S. worried about potential fallout.

YUKI NOGUCHI: If Greece is unable to pass austerity measures and cannot secure more international aid, it will start defaulting on $165 billion worth of debt this summer. At that point, its financial problems become like an infection.

Mr. JACOB KIRKEGAARD (Peterson Institute for International Economics): It starts obviously in Greece, and then it infects other countries.

NOGUCHI: Jacob Kirkegaard is a research fellow with the Peterson Institute for International Economics. He says the biggest problem with a Greek default is that it will scare investors away from buying government bonds of other European countries. That will make it much more expensive for countries like Ireland and Portugal to borrow money. And if that happens, the problems could spread to still larger countries like Italy or Spain.

Mr. KIRKEGAARD: But when you get to Spain, they're like a big bank. You know, they're not only too big to fail, but they're also too big to bail out.

NOGUCHI: Already some European banks, especially in France and Germany, are considered vulnerable to losses because of big investments in Greece. Yesterday, Moody's rating agency downgraded three major French banks. Jack Ablin is chief investment officer for Harris Private Bank, an asset management firm. He's quick to say the prospect of a Greek default or restructuring alone is no lethal blow to Europe's banks, but...

Mr. JACK ABLIN (Harris Private Bank): Perception is reality, so, you know, to the extent that investors believe that the French banks are infected, they could swoop in and try to redeem all of their holdings at once. So, it's effectively a run on the bank.

NOGUCHI: Investors in U.S. money markets, for example, could pull their European investments, further destabilizing the financial system. In short, Europe wants to and needs to quarantine the problem. But the question is how?

One school of thought is to continue to treat the patient. In other words, to make Greece swallow a bitter pill of additional budget cuts and tax hikes, and try to nurse it back to financial health through some combination of private and public rescue money. The other school of thought is let Greece fail.

Ablin thinks this wouldn't have to be catastrophic.

Mr. ABLIN: I would argue probably the best-case scenario would be Greece either defaults or restructures and dominoes don't fall.

NOGUCHI: Kirkegaard of the Peterson Institute agrees that ultimately Greece will, at some point, have to default or restructure its debt. But he argues delaying that process, stretching it out, by continuing to bail out the country in the short term will buy the European economy and its banking system some time to recover. It may be counterintuitive, Kirkegaard says, but ultimately this could end up being a very restorative process.

Mr. KIRKEGAARD: I think in many ways, the illness that Europe - or the crisis that Europe is going through right now, is one of the best things that have happened.

NOGUCHI: Kirkegaard does not mean all that turmoil is good. But he says he believes it will give countries the political cover they need to push through serious financial reforms and spending cuts.

Yuki Noguchi, NPR News, Washington.

Copyright © 2011 NPR. All rights reserved. Visit our website terms of use and permissions pages at for further information.

NPR transcripts are created on a rush deadline by a contractor for NPR, and accuracy and availability may vary. This text may not be in its final form and may be updated or revised in the future. Please be aware that the authoritative record of NPR’s programming is the audio.



Please keep your community civil. All comments must follow the Community rules and terms of use, and will be moderated prior to posting. NPR reserves the right to use the comments we receive, in whole or in part, and to use the commenter's name and location, in any medium. See also the Terms of Use, Privacy Policy and Community FAQ.

NPR thanks our sponsors

Become an NPR sponsor

Support comes from