Is the Greek debt crisis spreading?
(Read article summary)World stock markets fell as prospects grew that the Greek debt crisis is spreading to Portugal and other indebted nations.
The challenge that Greece poses for investors is not its size. Its economy is a small fry on the world stage.
The challenge that Greece poses is that it's a domino.
It stands at the head of a long line of shaky, indebted economies. If political and economic leaders aren't careful, the Greek debt crisis could trigger a market panic that would push other heavily indebted countries into default.
Self-fulfilling prophecy?
Here's how the dominoes can fall: Spooked by the prospect of not getting their money back, investors who hold nations' debt demand higher interest rates to keep holding that debt. Higher rates make it even harder for indebted nations to pay down their debts, spooking more investors, who demand higher rates, and so on.
It's a self-fulfilling prophecy that could hit much bigger nations, including Spain, Britain, and perhaps even the United States.
In the past 24 hours, the world has gotten a foretaste of what a default wave might look like.
On Tuesday, when Standard & Poor's downgraded its rating of Greek bonds to junk status, it also downgraded its rating of the debt of Portugal, another highly indebted nation in the euro zone. Major European markets swooned. The Dow Jones Industrial Average lost 213 points, its biggest loos since Feb. 4.
On Wednesday, the wave of selling hit Asian markets, with Japan's Nikkei index losing 2.6 percent of its value. In midday trading, European stock indexes in the euro zone swooned again: nearly 1.5 percent in Germany; 2.3 percent in France. The Greek and Portuguese stock markets saw even bigger plunges over the last two days.
