On Wednesday, June 29, 2011, Greece’s parliament approved a five-year €28 billion package of spending cuts and tax increases. Now that these austerity measures are in place, the eurozone and the International Monetary Fund (IMF) can release the €12 billion that is due from 2010’s package of rescue loans for Greece. Without these funds, Greece was expected to be bankrupt as soon as mid July.
Greece’s economy is the equivalent of Rhode Island. It is relatively small compared to all of Europe. The concern is the contagion effect of a debt spiral. International insurance companies, European banks and other countries own Greek debt. Therein lies the significance of Greece.
We do not believe Greece can grow its economy out of its current state. It is mostly a tourism and agricultural economy. The country does not have the natural resources to support much else. We believe that Greece will eventually state that the country’s bonds are worth 50% of the face value and offer that to the bondholders. The reason they do not do this now is because the eurozone wants the banks who own the Greek debt to reserve against it. We think this will be a slow process to preserve the European banking system. The only bump we see domestically is some money market funds own the debt of the banks that invest in the Greek debt.
We think that Greece will have to restructure their debt. Basic finance courses will teach you that raising taxes and cutting spending at the same time often do not work out well in the end. Greece is trying to shrink their economy by raising revenues and cutting the money given away to Greek citizens. Thus the Greeks will have to tighten their belts. The country’s full retirement age is 61 on average, but some hazardous jobs, including hairdressing, allows for retirement at 50. Knowing that will need to increase, the Greek people are rioting in the streets. Comparatively, full retirement age in the United States is 66, and it is increased by a month each year.
Before the euro, Greece could have devalued their currency so they could survive. For example, Mexico has cut their currency in half several times, which cuts what their bonds are worth. Greece cannot do that because they are a part of the eurozone. The euro takes away their sovereignty.
When considering the euro, the countries who have the money dictate the value. This would be Germany and France. Devaluing Greece needs to be a slow process because if all the banks had to write off their Greek debt tomorrow, it would likely wipe out their capital. We believe the recent austerity measures are a maneuver to save the banks and preserve the euro.
We believe the eurozone will support Greece for a few more years allowing banks to reserve against the Greek debt. In that time, Greece will let the banks know that the debt will be worth 50% of the face value so they can then pay half of what they owe.
We do not think Greece should have been let in to the eurozone in 2002. The country did not look financially stable then. We would not be surprised if Greece wanted out of the eurozone at some point in the future to return to the drachma for their currency.
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
