We May Be in Hot Water, But We’re Not Burning in Greece (Yet)

I read an article on May 6, 2010 which began with “Greek unrest still weighing on the markets.” The rioting and general strikes, which had begun approximately 24 to 36 hours before, were “still” distracting stock buyers in the United States and other equities markets around the world from their preoccupation with buying up the market. Imagine!

Unfortunately, the situation in Greece, even if confined to Greece, presents an almost insoluble conundrum. Or rather, it presents a number of extremely unpleasant actions and consequences and no painless alternative. Beyond that, the Greek problems are “contagious.” Even if they were not contagious, almost every other western country already has the same disease in varying stages of development.

The Situation in Greece

It is widely known that the Greek government is at risk of missing payments (“defaulting”) on its debt obligations. Since the Greek government, like almost every other western government, subsists largely on money that it borrows (rather than current revenues from taxes), and since it has a large existing debt, a default would have large consequences. Sovereign defaults make it impossible for the government to sell bonds (borrow money) except at high interest rates. In plain English, this means that a government that was spending more than it taxed must suddenly tax more than it spends. The general populace, accustomed to getting some services for nothing must suddenly get no services for something. Businesses needing to borrow money to expand or survive will not get it, and the standard of living will decline. Defaults are terribly destabilizing to societies.

On the other hand, there’s the bailout. That involves foreign governments lending money which everybody pretends must be repaid. This would allow the government to make its current payments and avoid default and higher interest rates or disappearing capital. But the price of this bailout is “austerity.” Austerity basically means a drastic curtailment of services by the government. Again in plain English, this means that government salaries would be cut, the equivalent of Social Security would be frozen or cut, emergency services reduced, money for education reduced, disability programs tightened and cut, unemployment services reduced… and the list goes on. At the same time, taxes will be increased. Government intrusion and burden will be extreme, government services and help will be reduced. Government will be a perpetual insult and irritation.

Either alternative is a recipe for civil unrest (which is in turn an impetus for dictatorship), and the riots have already begun. They are going to last more than 36 hours.

The Greek Situation is “Contagious”

What the press is not reporting among it photos of molotov cocktails and worried stockbrokers is who would actually receive the bail out money for the Greeks if the plan goes through as scheduled. So who gets it?

In the immortal words of Bob Dylan, “How come you had to ask me that?”

The banks, of course. And most of the banks who have bought Greek bonds are big investment banks in other countries of Europe. Those banks are all pretending to be solvent and just fine right now. A Greek default, however, would push some of these banks over the line into (obvious) insolvency, setting up a potential cascading series of defaults just as so many people warned could happen here in the U.S. if we hadn’t given our banks trillions of dollars in bailouts. The results of bank failures are much like those of a government default (although surely not as bad). Credit for business would dry up, unemployment would increase and there would be less tax money for governments. All across Europe.

Thus the open secret behind the Greek bailouts is that it is yet another bailout for the investment bankers who largely instigated all the problems in the first place. Tell that to the elderly or disabled Greeks who see their (equivalent of) $500/month pensions cut so they can starve while the bankers are driving around their Maseratis and vacationing on the Mediterranean.

Except they already know.

Now Multiply Greece by Ten

The Greek situation, dire as it is, not appreciably worse than what faces Portugal, Spain, Ireland and Italy, all of whom except Italy have much larger sovereign debts in terms of dollars, and all are facing similar problems in making payments. Greece is just the first country to have its back to the wall. These other countries, too, owe most of their money to foreign European banks, and any sovereign default would magnify the effects of any other country’s default. These countries will all face the same choices Greece is facing, and the possibilities for social unrest and revolution certainly exist. The pressure on the European Union will be enormous.

Now Multiply Greece by a Hundred

Great Britain and the United States have debt loads comparable to those of Greece. A few years ago the average Greek citizen no doubt could not have imagined the country being embroiled in the situation it now faces, yet its swelling debt and disregard for fiscal responsibility mathematically insured that this day would come. The average American shares the belief, suddenly out of vogue in Greece, that things will never fundamentally change. I leave the reader to draw the appropriate conclusions.

Ken Gibert is a professional writer and business marketing consultant and operates Golden Sun Consulting. He specializes in writing–articles, copywriting, ghostwriting…any kind of writing–and marketing consulting. He also has an enduring interest in the stock and commodity markets and has written extensively on these subjects.

If you’re interested in the author or for more information on marketing or writing samples, please see my site at: http://www.goldensunconsulting.com.