I consider myself a somewhat knowledgeable amateur in financial markets, but I can't for the life of me understand why the whole situation with Greece is such a catastrophe. Why do markets react to Greece defaulting on its loans like the end of the world, and why does the EU feel the need to bail them out? Everyone just says if they let Greece default without leaving the EU, then it will be a disaster for the euro. But why? Why does Greece defaulting mean the value of the euro goes down (significantly)? I can understand a little blip, but does the rest of the world suddenly not want euros because everything in Greece gets cheap? Is Greece really importing so much that its inability to continue to import will vastly affect the economies of other EU countries? I just can't imagine that is the case. Anyone else here have a clear picture on this?

If Greece defaults then ALL the money that they owe becomes marked "never gonna happen". The banks that have lent that money have borrowed more money from the central banks using the money owed by Greece, and the interest on it, as collateral. If the collateral goes up in smoke then those banks will be judged to be incapable of paying back the money they owe. Which will have the same effect on the central banks.

Additionally, if Greece defaults then Ireland and Portugal might follow suit, partly because of the direct effect but also on the basis that they may feel that the game's up and therefore might as well. The same things that apply to Greece apply to Ireland and Portugal. In particular, British banks are massively exposed to an Irish default and it would basically wipe out the UK banking system which in turn, combined with the Eurozone trouble caused by a Greek default would seriously threaten the US financial system which - whisper it - is actually in quite a bad state and being constantly bailed out by the Chinese. This is the Armageddon scenario that the financial world is crapping itself over.

Putting aside a default, exit, and re-issue of the drachma scenario, the other nightmare scenario that simply won't be allowed is that Greek could default and stay in the Euro. That would kill the currency stone dead as it would mean that the EU was saying that the central banks of Europe would allow a member state to borrow on the markets and have the other countries pick up the tab (or try to). At the very least, a defaulting country HAS to be kicked out of the Euro to show that the central banks are serious about not letting this happen again. Of course, it never should have happened in the first place and the fact that it has has brought the EU to the brink of collapse as a unit and even a default and exit for Greece could tip it over the edge; there's no way the Euro could survive a default and stay-in.

The long term is very shaky, even with today's vote by the Greek government as there is every chance that the next election in Greece will see a "stick it up your arse, we're leaving" party win and reverse anything the current turkeys have done to stave off Christmas. That's going to cast a long shadow over the Euro for probably years.

You might have noticed that the Euro isn't apparently very weak despite all this. This reflects the fact that the world's economy is reckoned to be fragile. Basically, all currencies are weak together. Gold is currently at about $1500/oz. People are selling dollars, pounds, euros, yen, and whatever else they have and are buying gold with it. Money as a whole is weak, in other words, while solid objects like oil, gold, even coffee and foods are going up in cost.

Greece may just look like a minor iceberg at first glance, but it's worth remembering that we're all on the Titanic together.

Thanks.

So the banks will default on their payback to the central banks? Even if that's the case, I don't know the numbers but it seems the amount that Greece borrowed must be weighed against the GDP of all in the euro zone in order to determine the significance. Also how does going back to the drachma help anything since the money is still owed?

I guess I just don't understand why Greece is "too big to fail" like the US banks were. I understand that if an entity is big enough, it can have a large effect on the economy, but is Greece's economic level really that high?