By no means a financial wizard, but someone who has been following this for a while now and researching everything I can to understand what it all means.
It's my understanding that the primary risk comes from wealth contraction.
Germany is the financial powerhouse of the EU. If they walk, several countries that are teetering on the verge of economic collapse are going to default on their debts.
During the last EU bail out, Germany put itself on the hook for billions in Greek debt. Of the 110 Billion Euros lent to Greece, Germany alone fronted $22.4 Billion Euros ($30 Billion US dollars).
When Greece defaults (as it will default), those who invested in Greece, or bought derivatives based on Greek sovereign debt, will lose a projected 60% of their investment over the term.
The contraction of wealth will make it more difficult to rescue other flagging countries, including Italy and Spain. Italy, Spain, Greece, and Ireland are all on economic life support, although Italy and Ireland appear to be taking their problems seriously. Greece and Spain, on the other hand (Greece in particular) are so used to government handouts that it will come as a very unpleasant shock once the gravy train ends.
The primary concern is the domino effect; once one falls, will others follow? There is that possiblity, which is why we in America saw a strong uptick in Treasury bonds (despite the fact that our credit rating was downgraded). Our electronic "funny money" via QE is still a better risk than countries without a fiat currency.
It's not just the wealth contraction than will come from loan defaults; it's the exponential wealth contraction that will come from derivative trading based on weak notes. There will be a primary hit directly to investors, then a secondary hit to traders.
If Europe doesn't experience financial contagion, then the impact will be minimal. If serial collapses occur, it will hurt our economy, especially since we fund so much to the IMF (which lent billions to these countries, as well).
Thank you for your explanation.
Still learning!
I thought Italy would promise its European partners an austerity program, but by the time it would reach the legislature, it was unrecognizable.