On another morning of Greek headlines, some may ask, why does Greece even matter? As many pundits like to argue, the size of Greece’s entire economy is only 2% of that of the U.S., and the EU has had 2 years now to prepare for the default. But the market remains transfixed for several reasons, with one reason nicely demonstrated by the following chart from the Guardian newspaper in March:
Greece is obviously the largest default over the last 50 years by a long-shot. What’s more interesting is that the raft of defaults from the 70’s through the 90’s was a who’s-who’s of emerging markets (like Mexico and Brazil), and the discipline imposed by the market as a result of those defaults forced those countries to get their fiscal houses in order. Yet the credit creation machine remained on overdrive in developed markets, creating massive amounts of debt in the past 30 years. Unfortunately, Greece is likely just the start of the developed world’s sovereign defaults over the next decade, and as a harbinger of events to come, the market duly pays attention.