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June 2 2011  / Opinion Article

Greek Debt Crisis

 
Greek Debt Crisis - Investors Are Unprepared

Should investors be concerned about the Greek Debt Crisis? After a recent visit, I believe investor should be worried about the economic crisis in Greece. Greece cannot afford the living standard that has been built on debt both sovereign and personal. I believe that stock markets and investors around the world are unprepared for the stock market collapses that will happen when Greece defaults. Europe's Banks which hold at least 100 billion of Greek debt have been moved further down the creditor ladder. The Greece debt crisis, is only part of the debt crisis in Europe. Ireland debt, Spain debt, Portugal debt, Italy debt are part of the larger picture. The European debt crisis dwarfs the scope of the collapse of Lehman Brothers. This is a disaster that will engulf investors around the world.

More than two decades ago I visited Greece and recently I had the opportunity to return to stay with good friends. I was shocked at the enormous changes this country has undergone. Many homes are of North American type standard and citizens have in many instances dynamited rock to put in private swimming pools. New cars were everywhere and the restaurants were packed every night. I marveled at the austerity which my friends explained is a myth brought about by mountains of debt and Greece's entry into the European Union.

I asked my friends for their perspective as Greek citizens and investors, about the Greek Debt Crisis? He explained that investors should fear not just the Greece debt but Ireland's debt, Spain's debt, Portugal's debts and Italy's debts. They explained that it is a debt crisis is all of Europe. Greece and many other European nations, cannot afford the living standard that has been built on debt. They explained that no amount of money in a bailout will work because the real problem is debt both sovereign and personal, that they believe can never be repaid. They explained that they have no investments in European securities, bonds, or currency. They believe that stock markets and investors around the world are literally unprepared for the stock market collapses that will happen when Greece defaults on its debt.

Note how my friends did not used the word "IF"  but "when" to describe the Greek debt crisis.

Over the course of my visit they explained to me that Greece owes about 460 billion dollars and that the bailout money is basically borrowing more money that has to be repaid. One afternoon they invited to meet a dozen of investor friends at their home, who have invested in stocks since the 1970's. It was a lively and interesting afternoon.

 

None hold any European securities and none are invested in the Euro. They explained that short term yields on Greek debt are as high as 25%. They told me that 25% tells you had bad the situation is. Just five years earlier Greek bonds were priced almost on a par with German bonds, which they feel was indicative of bond rating agencies refusing to acknowledge the growing problems of Greece. During the afternoon they told me how, many of their neighbors and friends have more than one car, take vacations outside of Europe, some send their children to private schools again outside of Europe and most pay no income tax. There is an entire black market of cash under the table for things like food, home repairs, gasoline, apparel and everyday sundries.

I told them that 460 billion dollars is less than Lehman Brothers owed when they collapsed. Lehman Brothers was around 600 billion in debt. They explained that the difference is that with the first bail out of the Greece Debt Crisis, Europe's Banks which hold at least 100 billion of Greece's debt (and a total of 1.5 trillion of PIIGS debt) have been moved further down the creditor ladder. The International Monetary Fund (IMF) and the European Central Bank must be repaid first. From my conversations with my Greek friends, it would appear that most of the first bailout has come from Germany and to a much lesser extent a handful of other European countries. They also explained how the debt of Greece is now as large as that of Canada, yet their economy is small when a comparison is done. They expressed total disbelief that this debt will ever be repaid and doubted that the other heavily indebt nations like Ireland, Portugal, Italy and Spain would ever repay as well.

 

The banks of Europe are a pillar of the investment world, just as they are in America, Canada and pretty much every country. Banks are important whether consumers like it or not. When Greece defaults the losses to European Banks will be devastating. But much worse will be the perception by investors that European Banks just like American Banks, are in trouble, and fear will create panic with far reaching repercussions. They explained to me that the fear of default is very real among European investors. They believe that upon default, investors will look at Greece as only the tipping point. They explained that investor perception about Ireland, Portugal, Spain and Italy being the next to default will plummet risky assets worldwide.

 

Asked what if anything can be done, they told me that people have to realize that taxes must be paid by both citizens and companies and it needs to be collected by the government. They also explained that Greece must lower their living standard to better match the actual Gross Domestic Product (GDP), which they agree will cause unrest among the population. But they believe it is the only way the nation has any hope of repaying some of the debt let alone manage to reach a surplus in order to assist reducing the debt burden. They also feel that staying with the EU is a mistake, that Greece was better without the Euro and their own currency was much more competitive giving them an economic "edge" that they no longer have. Last they explained that the Greek Government must be held accountable for dishonest projections, accounting practices and frivolous subsidy programs. They believe however, that their fellow Greek citizens are unwilling to make the sacrifices needed to calm the situation and get their "house in order".

 

SUMMARY

On June 1 2011, Greece debt was downgraded again, putting it deeper into junk status. I wrote this opinion piece because I do believe that Greece will have no recourse by to eventually default. My Greek investor friends could indeed be correct regarding the Greek Debt Crisis. Even if they are just half right, the markets could be in for quite a calamity. Remember that it is fear that drives markets up and down. Fear of missing a rally and fear of being caught in a downturn. For investors who wish to remain long term, perhaps consider some puts for protection. You can read part 4 of the article on dividend stocks that cut dividends which discusses the merit of buying insurance through purchasing long term puts for catastrophic, unforeseen events. It is often better to be prepared should Greece's Debt Crisis indeed have dire consequence putting markets into panic mode such as most investors, including myself, have never witnessed. 


GREEK DEBT CRISIS UPDATES:
May 3 2011

By far the best article I have read on the debt crisis in Greece. Brian Milner and Claire Neary of The Globe and Mail newspaper, should be congratulated for writing such an insightful report.

June 1 2011

Another great article today in Forbes which makes for very interesting reading. According to the article the Greek Debt Crisis is truly just a tip of the iceberg as the saying goes.

June 4 2011

seekingalpha article: More protests in Greece as anger rises over Greek austerity measures as new aid deal inches closer: Market pressure eases on Greece's bonds

June 4 2011

marketwatch.com article: In a recent article a number of analysts believe that the second bailout will be a lot higher than estimated. They believe the bailout will approach 100 billion euros. This just adds more debt burden on Greece. Why is no one targeting the real problems. This kind of debt on such a small GDP nation could mean years of austerity, high unemployment and industrial decline. More debt is rarely the answer.

June 8 2011

Greece's unemployment rate was released today and it has soared to 16%.  We all know that official statistics from governments are lower than the reality. Most likely unemployment is nearing 20%. Meanwhile industrial output dropped 11% and on the weekend more than 80,000 protested in Athens against the austerity measures. Greece is a powder keg ready to explode. When that happens and Greece defaults, stock markets will shudder, worldwide. I would not want to be holding any European or US Banks. According to an article last year in Forbes US Banks do hold some European debt. 

Meanwhile more and more analysts are beginning to see that the best thing for Greece is to leave the Euro behind, declare bankruptcy on their debt and get back to their own currency. It will hurt short term for Greece, but longer term it may solve a lot of their problems. However if this happens, the fear among investors will be that more countries may leave the Euro behind. Let's be honest, how can a Union like the EU survive when there are only two countries that are the industrial and consumer engines - Germany and France. This is a disaster waiting to happen.

June 9 2011

Greek workers at state run institutions staged a protest against austerity measures at the same time as the Greek government was meeting to seek more austerity measures in the face of the growth Greek Debt Crisis. What good the protests can accomplish is unknown since truly Greece has almost lost any sovereignty it once had now that the ECB and IMF are working towards a second bailout. But how can adding to Greece's debt burden actually solve this debt crisis? Is this like adding gasoline to an already burning fire? At the same time it is important to understand that the ECB is not a democratically elected body. In a recent speech, the present ECB President Jean-Claude Trichet said "We can see before our eyes that membership in the EU, and even more so of EMU [European monetary union] introduces a new understanding of the way sovereignty is exerted. Interdependence means that countries de facto do not have complete internal authority. They can experience crises caused entirely by the unsound economic policies of others." At the same speech he went to on to suggest that perhaps the ECB needs to set up a finance ministry with the power to veto "unsound" policies of EU members that could adversely affect the Union. How can a non-elected, non-democratic body be allowed such powers? The European Central Bank appears intent on creating its own authority. Events in Europe need to be watched closely.

June 14 2011

As the ECB struggles to come up with a solution and try to figure out how to involve private investors, it still seems oblivious to the ECB and most of those involved in averting Greek default that piling on ever more debt without truly establishing REALISTIC goals for austerity measures and actual debt reduction and repayment, is just another "kick the can" down the road strategy. A recent article on bloomberg.com discussing the delay in a second bailout just continues to indicate that the effort of a second rescue seems to show that no one gets the real picture. Could it be that because Europe has always been so divisive that to come up with a "real solution" is not possible and not even plausible. Imagine how different this problem would have been without a European Union. If Europe were separate entities and Greece defaulted, it would be one small country with less than 1% of the entire globe's trading. This would force countries like Greece, Ireland, Portugal and others to get serious or they would pay a very high price for their inability to seriously attack their fiscal responsibilities. Meanwhile the rest of the world would be able to focus on strengthening their economies and managing their own debt problems. However within the EU, the weak members continue to plague the union. Right now this seems like a very poor idea to try to establish a general currency within different sovereign nations that have centuries of irreconcilable differences. Meanwhile weaker members begin to weaken the stronger members and they outnumber the stronger members. This is just the first test of the European Union and so far they get a failing grade.

June 17 2011

You can tell that the EU is pretty determined they will hold together and not let the Euro get trashed, let alone allow Greece to not just restructure (which is the same as default), but also not leave the EU. I read an excellent article today on www.marketwatch.com about the other side of the argument. Why not let Greece default. Right now Greece owes about 500 Billion. This is around the size of the National Debt of Canada. Greece though has an economy nowhere near as large or as diverse. This truly means a terrible burden on Greece and Greeks - no wonder they are rioting. All this because of the facade of prosperity by joining the EU. This problem is not going to leave. I have friends in Portugal who have been out of work for over a year. Problems in Portugal are almost as bad as in Greece. I also have a cousin in Ireland who is a master electrician. After a year of being unemployed, he and his family abandoned their home in Ireland and now are back in Toronto. His home has plummeted in value and there are no buyers. He is hoping the future may improve for Ireland but again, here is another country mired in enormous debt that is beyond the ability of their citizens to repay. Meanwhile within Europe, the belief is a relief rally may be on the verge of commencing as most feel the Greek second bailout will get put in place shortly.

 

 

 

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