Personal Finance

Tom Hudson: Faith in financial system put to the test in Greece

The currency of modern money is trust. Buyers trust that sellers will recognize the value of their money. Lenders trust that they will be repaid. Entire financial systems rest on the confidence of consumers in their economy.

That faith has been put to the test in Greece. It will be tested with Sunday’s countrywide referendum on whether to accept new government spending cuts in exchange for better lending terms. It will be tested in the week ahead when Greek banks are expected to reopen after being ordered closed.

Except for 1,000 banks allowed to reopen Wednesday for pensioners without ATM cards to withdraw a maximum of 120 euros ($132), Greek banks have been closed since June 29. The hope was to build trust by Greeks that their economy was not on the edge of collapse. Unfortunately, but not surprisingly, limiting the supply of money in Greece only amped up demand.

Former Greek representative to the International Monetary Fund Miranda Xafa told Bloomberg Television that if the banks don’t reopen as expected, “there would be chaos. There would be social unrest.”

If that comes to pass, it will test investors’ confidence in Europe’s ability to contain Greece’s mess. Twice in the past five years, European lenders have had to mollify international markets by easing their payback terms for Greece. They have been reluctant to do it a third time, making Greece the first developed country to default.

Greece may be far from your investment portfolio, but the price of trust isn’t.

Financial journalist Tom Hudson hosts The Sunshine Economy on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.