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Greek Debt Crisis Sparks Flight to Safety, Could Trigger Global Economic Meltdown

By: Steve Johnson

4/27/2010 - 44 Comments

Panic began to grip the market on Tuesday, with the Dow dropping over 200 points.

Earlier in the day, Standard and Poor's downgraded the sovereign debt ratings of Greece to junk status and lowered the investment grade status of Portugal, citing weak "macroeconomic structures" for nations.

The Greek debt meltdown could lead investors to abandon risky investments in favor of safer ones, like Treasuries.

For the last few months, economists have continued to say, “It’s contained, it’s an isolated nation that accounts for only 2 percent of Europe’s GDP".  Where have we heard that before?

But the rising interest rates that result from this debt crisis will spread the impact to many other nations that will affect all of Europe.  Spiking interest rates could put many Banks in a lot to trouble.  And if the public starts to panic, even a little bit, they will begin pulling their money out of banks, which will quickly exacerbate the problem. 

Perhaps the crisis will be supportive for the dollar and Treasury bonds, the ultimate havens, which will give Obama and Fed Chairman Ben Bernanke another break before the U.S. finds its own Bonds downgraded by S&P.  This window of opportunity could be the last chance that Obama has to cut our debt.

Another interesting area for the foreseeable future is in the potential breakdown of the European Monetary Union, which could lead to global financial meltdown – even greater than what we had in 2008.

The yield on Greek bonds surged to unprecedented levels since the introduction of the euro in 2002, with the 10-year note yielded 9.76% on Tuesday, up more than 2% from the previous day's close.

Greece was in trouble at 6%, they have almost no chance at 10%.  It is now clear that they are likely to have to default on their debts and bond holders are going to take a large loss. 

What is even more troubling is that many other nations are running just as high debt ratios and the entire world is swimming in debt.  If this is just the beginning of many national defaults, than there is no long-term safety in moving from Greece Bonds to Treasury Bonds.

If this is the beginning of the second global market meltdown as investors are forced to unwind their leveraged positions, than this is a good time to shore the market as I have suggested a few months ago.

Here is a video with the latest news about the Greece financial meltdown.

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