Greece: The Next Too-Big-To-Fail?

The story sounds familiar: a major entity unable to service its debt and in need of help. Only this time it’s not Lehman Bros.; it’s Greece.

The story sounds familiar: a major entity unable to service its debt and in need of help. Only this time it’s not Lehman Bros.; it’s Greece. When Lehman went down, with it went major financial institutions such as AIG, Bear Stearns, and Merrill Lynch. Should Greece fail, it has the potential to take with it Portugal, Ireland and Spain – not to mention threatening the entire system of the euro.

“This is damn complicated,” former U.S. Sen. Chuck Hagel said earlier this week while addressing an audience at DLA Piper’s Global Real Estate Summit 2010. “You have to think through consequences.”

The European Union has approved a 110-billion euro ($141 billion) bailout to save Greece from bankruptcy. However, investors reacted poorly to the three-year loan package, with the euro falling and Greek bond yields only slightly improving after the news was announced. The European parliaments must now decide whether to okay the bailout. Germany, responsible for the largest share of the bailout, is expected to vote on Friday.

In the wake of this financial crisis, shadows of doubt are spreading across not only Europe but the world. Japan’s Nikkei 225 index dropped 3.2 percent on Wednesday, while indexes in South Korea, Singapore and Hong Kong also experienced drops. Australia’s benchmark was also down 1.7 percent.

So will the bailout be adequate to keep Greece’s problems from bleeding across its borders? Hagel has his doubts.

“You have to question whether Greece can be saved this way – or are we just putting 110 billion euros on the table for what? Are we just postponing the day of inevitability?” he asked. “Whether it works or not, I don’t know. … We’re going to be paying the high price.”

That said, he believes the country will pull through.

“Greece is going to survive – it’s been around a while,” he said to audience laughter. “There’ll be some significant adjustments that we’re all going to be dealing with these days.”