Worried about Greece?

I don’t often write commentaries on a daily basis, but the developing saga and fear based market moves related to the current Greek credit crisis deserves your attention and a bit of understanding.

It is estimated that the total amount of Greek debt is well above $300 billion. That would make a default there one of the largest in history for one country. Larger than Argentina in 2002. And, Greece is not the only European country that has more debt than it can repay. It is a big deal.

Defaults like this (but not necessarily this large) however are not as uncommon as the average person thinks. Between 1998 and 2004, there were 15 governments that defaulted on their debt. Between 1976 and 1989, there were more than 40!

One of the things that I thought we learned in the past is that in most cases, by the time default is contemplated, the situation is usually so bad that a large part of the loans need to be written off. Here are some quotes from the EMTA’s site (link below) “The Brady Plan, the principles of which were first articulated by U.S. Treasury Secretary Nicholas F. Brady in March 1989, was designed to address the so-called LDC debt crisis of the 1980's…..From 1982 through 1988, debtor nations and their commercial bank creditors engaged in repeated rounds of rescheduling and restructuring sovereign and private sector debt, in the belief that the difficulty these nations experienced in meeting their debt obligations was a temporary liquidity problem that would end as the debtor nations' economies rebounded. However, by the time the Brady Plan was announced, it was widely believed that most debtor nations were no closer to financial health than they had been in 1982, that many loans would never be entirely repaid, and that some form of substantial debt relief was necessary for these nations and their fragile economies to resume growth and to regain access to the global capital markets.” Read more at the site:

http://www.emta.org/template.aspx?id=34

What I thought we learned from past was that some sort of market based solution is necessary. Repackaging and reselling the debt. Something similar to the Brady Plan has been proposed by Daniel Gros, Director of the CEPS and Thomas Mayer, Chief Economist of Deutsche Bank. You can download their plan at the link:

http://www.ceps.eu/book/debt-reduction-without-messy-default

One thing that is different this time is that those same pesky Credit Default Swaps we learned about during the mortgage bond credit crisis here in the US are involved in this crisis too! Seems like the French and German banks bought “insurance against default” on Greek, Irish and Portuguese debt—from US banks! So, it gets a bit more complicated. And, it is logical that a possible and probable default in Greece is creating a “not this again” fear in stock markets. i.e. 2008 all over again.

What is probably different however is that companies have prepared for this storm with strong balance sheets. And, hopefully, the US banks have prudently “reserved” for losses from their CDS "insurance" they have issued, with more capital. The Greek people vote on June 29 and June 30 on whether they will accept more “austerity”—a condition placed by lenders for more “bailout” money. It appears that markets are getting ready for the possibility that they will refuse and the crisis escalates. (Think Wisonsin.) Be prepared for volatility, risk and great uncertainty in this case. My best guess is that a temporary solution will be implemented, and then, sooner or later, the losses will be recognized and the crisis will end. We are at the end of the beginning of a resolution. I think this issue will be in the news for quite some time. I do not think that this week’s actions will merit any major portfolio changes, yet, as markets are likely to snap back very quickly. Be sure all of your present investments are long term oriented--the bottom of this may be a very good entry opportunity.


This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.