Going Greek

Markets were, again, disturbed by news from Greece this week.

For those of you who don’t pay much attention to these things, Greece is in a serious fiscal bind. You see, their fiscal deficit looks to be around 13% of gross domestic product.

When a country typically crosses the double-digit barrier, their interest rates spike and their currency tanks. Markets don’t like it when a borrower’s revenue falls short of it’s obligations by more than 10%. It indicates the borrower may default.

Greece, however, is in a unique position. It is part of the European Union and has adopted the euro as its currency. The result is that Greece’s problem is really western Europe’s problem.

It reminds me of the joke about borrowing from a bank. When you borrow $10 thousand and are having problems making payments, it’s your problem. But, when you borrow $10 million from the bank and are having problems making payments, it’s the bank’s problem.

Greece is Europe’s problem, and that has markets much more nervous than if it were just Greece’s problem.

Economic and currency unions have not stood the test of time. None have lasted. For this reason, many are skeptical the euro or European Union will last, either.

Greece is exacerbating these fears because many market participants worry that Greece’s problems could break up the union. The euro is down almost 15% from its peak (hopefully this trend will continue at least until my trip to Paris this May), and these issues are part of the reason.

What seems to be lost in this shuffle is that the rest of the world is going Greek, too. The movie in Greece may soon replay in the rest of the world, and by players too big to be bailed out by Germany or France. Niall Ferguson eloquently pointed this out in the Financial Times yesterday.

For example, look at the good ole U.S. of A. Our fiscal deficit is also in double digits this year. For that matter, Japan, the United Kindgom, Ireland and Spain find themselves with similarly difficult fiscal positions.

Some of the biggest economies are going Greek, and the investment implications are important.

For now, it looks like the global economy is recovering. This will likely provide a temporary respite from these fiscal problems. But, eventually, the piper will need to be paid.

When that happens, it might be nice to be far from government bonds and have some downside protection in place. When the world goes Greek, it won’t simply “disturb” markets.

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.