The economic impact of Greece on the world economy is tiny.  According to the World Bank, in 2010 Greece’s GDP represented $302 billion less than ½ of 1% of the world’s economy of $62 trillion.  However, sometimes looks are deceiving.  The real issue is not that Greece’s debt is so large.  According to the Economist on May 14, 2011, the amount is 143% of GDP or about $432 billion, which is less than the US Treasury’s Troubled Asset Relief Program (TARP).  The real problem is that like subprime mortgages, there has been a very active business in credit default swaps of Greek debt.  So the real question is how much the hedge funds, banks, and other financial institutions bet on Greece going under.  If the multiples are anywhere near the subprime numbers, we are looking at a $3 or $4 trillion hit to the world economy.  That will slow things down considerably.  Think of it this way: when Lehman Brothers went down, its debt was about $600 billion and the economy and banking system were much stronger.  With the Greek crisis, we are looking at a hit that is half the size of Lehman Brothers which would probably be followed by defaults by Portugal, Ireland and Spain and possibly Italy.  If that occurs, we are looking at a collapse that is ten or more times the size of the Lehman Brothers collapse and a possible takedown of the world economic system since many banks in Europe and the US would collapse under the bad sovereign debt.  Add in the credit default swaps and we have losses somewhere in the $30 trillion range or about half the world’s annual Gross Domestic Product.

The good news is that the US dollar would soar and the Euro would collapse.  The bad news is that the US government would be called upon to bail out Europe.  In reaction to the debt crisis there are only a few choices: increase domestic spending, hunker down and/or provide foreign aid.  My guess is that the US would provide foreign aid, further weakening our economy while the number 2 economy China would spend more domestically, further strengthening theirs.  During the 2008 economic crisis this is exactly what happened.  The Federal Reserve and the US Treasury loaned money and provided grants to foreign as well as domestic financial institutions.   In the current scenario, we could expect the US debt to exceed $16 trillion and we taxpayers are expected to bail out the government.  So, although we are looking at a slow but improving economic situation as we approach summer, there is a possible disaster lurking and we may unfortunately fall into that trap.