Tag Archives: Greek debt

The Financial Nightmare of Greece

Finance 101 is something I can teach every fifth grader: When you buy something, you have to pay for it. Either you pay for it right away, or you pay for it later at a lot higher price.

That, essentially, is the problem in Greece playing itself out with riots and deaths as protestors fight that basic logic of going in debt. When full pension retirement comes in the mid 50s, their utility company loses money, taxes are low, they have a huge underground economy, and massive social programs are so-called “free,” eventually the tab comes due. That’s now.

There was a protestor quoted yesterday as saying they’re being bled to death. No, that’s just stupid. You’re being forced to pay for what you and your countrymen have enjoyed for decades that your country never could afford – period.

Greece owes hundreds of billions of Euros to bond holders, lenders, and other governments. Now they’re asking for more and more bailouts. But others have money – the Greeks don’t. So, if I’m borrowing money I get to set the rules. Same as when we apply for a loan. YOU don’t set the terms – the lender does. You can say no, but you don’t get a vote in the rate, etc.

Right now, Greek bonds are at 30% for two years. Imagine that! That’s how risky the investment world thinks Greece is. And the $17 billion the European Union is asked to advance right now is just to cover the next few months! It isn’t solving a thing but treading water. But they won’t write the cheque if the Greek government doesn’t sell their money-losing public utility, increase tax rates, and do some other austerity measures.

When there’s financial trouble, whether it’s you, me, or governments, you can see it coming years in advance. Ignoring it means somewhere down the road, it’ll be hugely painful. Greece is there. The US has another two or three years, based on the estimates of a number of experts.

One thing you can bet on is that the Greek government will fall and there’ll be an election. And the next party elected will be one that’ll promise to ease up, reduce taxes, and the likes. People want to hear what they want to hear. Even today, Greeks are still in denial. I would suggest they haven’t learned. But then, I’d suggest we also don’t learn from others until we, as individuals, are in the same place. How sad. How stupid. How unnecessary.

Greece, Goldman Sachs & the Canadian Dollar – They’re All Connected

The three big financial stories of the last week are all inter-connected, and do affect us all, directly or indirectly:

Last week, the U.S. Security and Exchange Commission charged the investment giant Goldman Sachs, with civil fraud. They are alleging, and it’s only that, until proven in court, that they defrauded investors out of over a billion dollars in selling mortgage backed securities. In the U.S., those are the mortgage packages sold all over the world, and probably in your mutual funds or pension plan, too. Yet, at the same time as they were selling and promoting these, Goldman Sachs was also betting that they would default sooner or later. At yesterday’s hearings in the Senate, there were a bunch of internal e-mails released where their big cheeses actually described these mortgage packages (so call collateralized debt obligations) as crap. Nice they were selling them to investors all over the world, while that’s what they thought of them. Stay tuned, there’s lots more to unfold here.

Yesterday also brought the official word that rating agencies have downgraded the debt that the Government of Greece owes to junk status. In other words, they’ve decided it’s the highest risk debt there is. It’s another lesson for you, me, and governments everywhere, especially in some European countries, that borrowing only works for so long. Greece has a lot of social programs, a very bloated civil service, and debt as far as they eye can see. What the government doesn’t want to do is to increase taxes, increase sales taxes, or to start making drastic cuts to government spending. It looks like now they will be forced to. Until they do, the rich cousin of Europe, Germany, has no intention of lending any more money to Greece. Their thinking is that the drastic cuts have to come first, and Greece has to first show that they can live on what they make. Gee, kind of like we have to – or should! Until then, more refinancing and more loans becomes like giving a drunk another drink.

Ironically, it was Goldmans Sachs who worked with the Greek government a few years back to convert some of their debt into complex financial instruments that nobody could really understand. It did make their finances look a lot better than they actually were. That is what it took to get Greece admitted to the European Union at the time. Ah, shuffling debt around, like we don’t often do that, transferring money from credit cards to lines of credit, and so on. But the chickens always come home to roost.

Finally, as a result of the debt rating for Greece, our Canadian dollar dropped over a cent. It did, but what really happened is that the U.S. dollar rose a lot. Investors were fleeing the Euro and getting their money out of the volatile environment over there, and going to a safe haven for their money – which is the U.S. So it was way more of a U.S. dollar increase than a Canadian dollar drop. The good news is that the U.S. needs investments. Now, we’re talking trillions here, not “you and me” amounts of money. And more money into the U.S. economy allows them to keep interest rates low for some time yet, and that’ll help the economy to speed up, and gives time for the housing market to heal.

Yes, we’re all in this together. What happens in Greece affects us. Because we’re all in one economy together, and money, debt financing, and investments don’t have any borders. Whether we like it or not, some far away problem becomes our problem literally overnight.