It’s been five years since I’ve written about Greece. Given the market’s current infatuation with that subject, it’s not a bad time to revisit the topic.
To recap: Greece borrowed a lot of money that it can’t currently repay (some would say: can never repay). The Greek government, I’ve read, pays out three euros for every one they take in as tax, so the basic math is unsustainable.
Five years ago, many thought that Greece defaulting would cause a cataclysmic market failure that would lead to a domino effect in multiple markets. At the time, the recency of the 2008-2009 economic collapse made this possibility seem very real and scary. So, Greece was bailed out and given more time to work out its issues.
Greece has not made much headway. When people get used to not paying taxes, they don’t eagerly jump into paying them again. When people get used to receiving government checks, they don’t willingly stop cashing them just because they’ve heard the government doesn’t really have the money. That’s just how most people function.
When a lender lends money, both the lender and the borrower end up with some responsibility. Greece is clearly responsible for paying off its debts. At the same time, the lenders are responsible for lending money to a country that–without massive structural changes–can’t repay those loans. Both Greece and its lender may be indignant, but they’ve both played a part in creating the current crisis.
The basic math says that Greece can’t repay its debts, and that it shouldn’t get additional loans until it reasonably commits to specific measures that will enable it to sustainably pay back its loans. The negotiations between Greece and its lenders that keep failing are about which side has to give up the most.
Greece’s leader was recently elected to make European lenders carry more of the responsibility. He has carried through on his campaign promises by defaulting on loans in order to force a better deal. He has also put Europe’s terms to the test by putting them up for a popular vote on Sunday. I don’t think anyone knows the outcome of that vote.
What is different now from five years ago? There’s been five years for people to alter contracts, make contingency plans, and just get mentally prepared for Greece to default and to potentially leave the euro currency, European Union or the European Community. The damage now wouldn’t be as great as it was five years ago.
The scarier prospect is that Portugal, Spain, Italy, and perhaps even France may end up in the same situation several years from now (they all have structural problems that haven’t been fixed, though none as bad as Greece), and that the European currency/Union/Community could completely come apart. This would not be the end of the world, but it would create a lot of inefficiencies that would slow global growth permanently.
There is always some possibility of a greater market contagion. For example, suppose some bank or government or hedge fund owns a LOT of securities that head south if Greece defaults or dumps Europe. Suppose also that they bought those securities with short term debt and they have to sell other securities to repay their loans, thus forcing down the prices of other, non-Greece related securities. Then, those price declines lead other indebted securities holders to have to sell their securities, etc. You get the picture. I don’t think that is likely, but market contagions have occurred in the past on just such similar lines.
The more important point of Greece’s situation is that governments and people aren’t above the laws of economics. They may not like economic laws, but they can no more be avoided than the laws of physics, chemistry, etc.
Governments, just like people, can’t spend more money than they take in. 1) Printing money 2) shifting budgets, 3) giving away other people’s money doesn’t create economic growth. Only production creates growth, and governments aren’t productive. The laws of economics will hold up whether anyone likes it or not. The sooner people face that reality, the sooner we can all go back to being productive and growing again.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.