IT is undeniable that a combination of events on Wall Street in the past four weeks has stirred market uncertainty. The latest blow came with the threat of a Greece default, an event that may push Europe into another recession, from which it has barely emerged.

As a result, European and Asian stocks fell, and soon after US stocks took a plunge creating an all too familiar feeling that haunted investors, while setting the stage for a global market selloff. The most vivid evidence of this was when the Dow Jones Industrial Average (DJIA) closed below the 10,000-mark for the first time in over three months. While Greece’s financial dilemma is a cause for concern, the fact remains that the eurozone has no choice but to throw the country a lifeline — a detail that investors seem to be overlooking.

Nonetheless, what this has shown is that it may not be smooth sailing in 2010 for stocks as it was last year as the market tries to stabilise. Before sustainable growth can occur, developed nations across the globe need to get their fiscal budgets under control and achieve continued positive economic growth. However, the pullback has acted as a sign that the markets have begun to mature, taking away some of that excessive optimism that unsubstantially propelled a ten-month rally in which the market surged over 65 per cent.

On the heels of default talks which surrounded Dubai late last year, Greece has become the latest victim of burdensome levels of sovereign debt, an issue which has infamously stirred the markets so far in 2010. But one of the most notable differences between both scenarios is the market’s over-reaction to a Greek default. On February 4, 2010 the Standard & Poor’s 500 (S&P) Index plummeted 3.1 per cent in its biggest one-day retreat since last April on concerns over widening fiscal gaps in the euro area. Comparably, the S&P 500 Index fell by only 1.72 per cent on November 27, 2009, the largest one-day decline since speculations about Dubai were reported just three days prior.

So why have the markets responded so differently, despite the effects of a potential default from both countries being comparably severe. A Dubai default was promoted as a disaster which would usher in a second phase of the global financial crisis, while a default from the Greeks is vetted to spur a eurozone crisis, crippling the southern member states.

When news broke about a possible Dubai default, its sister emirate and oil-rich neighbour Abu Dhabi immediately announced its financial support. However, over in Europe, there was a completely different reaction. Financial leaders, led by Germany, the king of exports and France made it crystal clear that the European Central Bank (ECB) had a strict “no bailout” mandate. In fact, this issue has been on the table from the last quarter of 2009 before jumping to the forefront just two weeks ago. Greece’s irresponsible and exorbitant public spending, tax evasion mentality and statistical manipulation have fostered intense political scrutiny from its eurozone counterparts, and hence their reluctance to throw taxpayers’ dollars to help bailout the Greeks.

Burdened by negative economic growth, Greece posted a budget deficit of 12.7 per cent of GDP in 2009, the highest in the eurozone’s 11-year history and more than four times the European Union’s (EU) three per cent limit. But committed to cut its deficit to 8.7 per cent in 2010, Greece needs to sell EUR$ 53 billion of bonds this year, approximately 20 per cent of its Gross Domestic Product (GDP). It has already implemented cuts in spending, tax increases and a freeze of public wages. Nonetheless, the adjustment in fiscal policy required will be too much for society to absorb, prompting a need for financial assistance. As the eurozone will more than likely step in, deservingly or not, the Greek government appears to have dodged yet another bullet.

While only constituting 2.7 per cent of the euro-area’s EUR$13 trillion economy, a falter from Greece could trigger a contagion in the region, which merely mustered 0.1 per cent growth in GDP in the fourth quarter from the prior three months.

Additionally, the story is much the same among its larger peers namely Spain, Italy and Portugal, which each have their share of problems. In particular, Spain trails behind Greece as it suffers from an unemployment rate of 19.5 per cent, the highest in the region.

However, despite these worrying statistics, the chance of a Greece default and an exit from the eurozone is slim to none. In fact, in Wall Street terms, Greece is simply “too big to fail”. Holding EUR$ 300 billion in debt to foreign banks, with approximately one-fifth being held by the UK, it is in the full interest of the euro’s 16-member states as well as the wider European region to support and ensure the financial stability of the euro area.

Known for fledging its statistics to join the eurozone, Greece’s uniquely huge shadow economy (non-tax paying) and its inefficient and oversized public sector are two of the primary reasons for the exacerbation of its fiscal woes. According to the Organisation of Economic Co-operation and Development (OECD), uncollected revenues in Greece amounted to 13.6 per cent of its GDP in 2007, a figure that could easily plug the gap in its budget.

On the other hand, there are other fundamental issues which plague the region as a whole. Southern European countries have been burdened by slow growth due to an overvalued currency and lost competiveness — forming the basis for the EU’s economic fragility. However, coupled with the inability to devalue its currency to make goods more competitive or to increase interest rates, these economies were fated to have uncontrollable fiscal deficits – a consequence expected if countries are left with fiscal policy as their only means of economic control.

As the “one-size-fits-all” monetary policy appears to be crumbling, the EU must go back to the drawing boards to reassess these issues. However, before then, Germany, the uncrowned head of the pack must step up to help ensure financial stability as well as to protect the long-term viability of the eurozone, even it means having to dip into its own pocket. While the steps to correct this European dilemma may be uncertain, as EU officials are still bickering among themselves, one thing is certain — this is just a hiccup for the eurozone which will regain its footing.

Juvenne Yee is a Research Analyst at Stocks & Securities Ltd. You can contact her at jyee@sslinvest.com.