Greek Bankruptcy Might Be The Best Thing To Happen To The Markets

Greece has been in negotiations with its partners for 6 months and no solution has been found yet. Bankruptcy or not is what keeps the markets awake at night, of course. Whatever the result will be, the odds are high that the markets will respond positively.

Greece is a small player in fact, with a GDP of $241 billion. In comparison, the US a GDP of $17 trillion, China $9 trillion and Germany $4 trillion. The fear, however, is rooted in the danger of ‘contamination’.

Investors are thinking that when Greece goes broke, the European bond market will crash, interest rates will go up, and the stock market will crash. This would push the world into a recession once again, a situation that would mean the end of Western capitalism.

Contamination, however, often resembles more a short-term cold than a pandemic. The Russian bankruptcy of 1998 caused a drop in the Dow Jones of 18% in the 2 months before the end game out of fear of global contamination. 3 months after the actual bankruptcy, all losses had been made up and a year later the Dow Jones was already listed 47% higher.

The bankruptcy of Argentina in 2001 – $132 billion and at the time 1/7 of all Western debt – barely caused a dip in the financial markets. There are many more examples like these that underline that we should not be panicking about the situation in Greece.

Whatever the outcome will be, the odds are high that a drop in the financial markets will only be of temporary nature. In the long term the Greek crisis will be a footnote in financial history. A Greek bankruptcy could be the best thing to happen to the markets, at least all uncertainty will be done with.