What will happen to Greece?

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This past week the stock markets performed really well. Much of the gains in stock prices were attributed to Greece passing legislation to cut government spending. This puts them in a position to receive loans from the IMF to avoid default. However, most top economists and others knowledgeable about the situation think that Greece will eventually default on its debts anyway. So then why are investors happy when most people think Greece will default even with these loans? They are looking at it as more time added to the clock to fix up other countries. I know this might sound confusing, but I’ll explain it in simpler terms.

There are a bunch of countries in Europe with debt problems. Greece is one of a handful in Europe, probably the worst of the bunch. Greece is also a relatively small economy that cannot really hurt the global economy if it tanks. The fear is that if Greece fails, then other European countries with debt problems will follow suit. Two countries in particular are large and can bring down the global economy. They are Spain and Italy. So really, no one is scared about Greece, they are scared about the spill over effect to Spain and Italy.

The hope is that if the IMF can help Greece avoid default in the short term it will give Spain and Italy (as well as, Ireland and Portugal) enough time to fix their debt problems. The same can really be said for the entire European financial body. Investors don’t have much faith and Greece, nor should they. However, they do believe that given some time Spain, Italy and Europe more generally will be able to strengthen themselves and be able to withstand default by Greece.

Greece’s default seems like an¬†inevitability. Hopefully it won’t happen until the rest of Europe is strong enough economically to stomach it.