I couldn’t help but be hypnotized by the almost 1,000 point market drop, and whiplashed by its subsequent jump within 15 minutes. The Greek situation is now believed to be far more than a liquidity crisis but rather an issue of solvency, and one that is not likely to be contained regardless of any short-term band-aid solutions. The foundation of this crisis is the sovereign debt explosion in industrial countries (i.e. bloated public finance landscape marked by governments spending beyond their means), and its implications are yet to be determined.

There are many factors at play in determining the consequences of this fiasco, including:

- How Greece will react to its having to lower its sense of entitlement, after the deadly riots and crippling strikes seen as a reaction to its austerity program
- When Germany’s patience will run out after already “subsidizing” the weaker EU nations for so long
- How successful the EU & IMF will be in stopping the bleeding in Greece and managing the situation throughout Europe to prevent Portugal, Spain and Italy from following suit

Yes, there are the likely consequences for the global economy as a whole:

- Aggregate demand will decrease, negatively impacting trade flows and adding a fiscal drag throughout Europe
- Capital will be reallocated, firstly away from the weaker members of the Eurozone to the stronger ones, and secondly towards the US, most likely
- Volatility will continue to rule, risk will be re-priced across the board (think widening credit spreads)
- Investors will look away from the oscillation of equities towards the relative safety and liquidity of government bonds, as they readjust their risk appetites
- The Euro is likely to continue its decline versus the dollar (having reached a 14-month low late last week)

Yet we couldn’t help wonder what the consequences may be for Manhattan real estate. It does require extrapolating 5-6 steps ahead to even get to that point, but that’s what we’re here for. It’s premature, and it’s hypothetical, but here are three interesting scenarios of where things may go (not mutually exclusive and collectively exhaustive (MECE)):

Scenario 1 – Brief buy-in: The purchasing power will continue to deteriorate, sparking fear of a long-term continued demise of the Euro. This may prompt Europeans to buy now before it gets even worse, and at least park their money in dollar-denominated real assets such as NYC real estate. (Though we find it hard to believe, we have heard from several agents already that those European buyers sitting on the sidelines have been jolted awake into a renewed sense of buying purpose over the last two to three weeks.)

Scenario 2- Long sell-off:The purchasing power of Europeans will continue to deteriorate. According to Urban Digs’ calculations, that purchasing power has dropped 7% just in the last three weeks, and a whopping 15% from November of 2009. Those foreigners who already purchased investment property in NYC over the last few years will find it the perfect time to offload those investments as the currency gains will outweigh the local market depreciation of those properties. Result: a potential mini-flood of foreign-owned apartments. Depending on the volume of these sales, this may or may not depress local prices.

Scenario 3 – Flight to liquidity: The longer-term crisis is larger than most had expected. The weakest of countries opt out of the Eurozone and precipitate the break-up of the European Union, the Euro proves to be unsustainable, and the global economy stagnates. Liquidity is at a premium and investors are not willing to commit to the purchase of real property, despite record low interest rates (the rush to treasuries saves the Fed from doing all of the heavy lifting in keeping rates low). Spurred by a flight to safety, investors will instead opt for REITS, commodities or TIPS as ways to ride out the storm.

While no one has a crystal ball, the one thing we can say for certain is that there is more uncertainty that lies ahead. We live in interesting times, and they’re only going to get more interesting over the coming months, to be sure. We would love to hear your thoughts on other possible scenarios over the short-to-medium term.