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.
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.
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. |
