Thoughts on the Greek crisis
How can a financial crisis in a small European country have such a large effect on world markets? This is the question I recently received from an investor and a friend.
My answer is simple: In the same way that subprime mortgages, which were held by a minority of U.S. households, nearly brought down the entire financial system, so debt problems in a small country can shake global markets. It is not that subprime or Greek debt problems are themselves threatening. It is what they are suggesting about the systemic nature of the debt bubble that arose around the world over the past decade.
At a high level, the Greek problem is the same problem of U.S. subprime mortgages: In a very low-interest-rate environment, where the world economic system appeared to be “de-risked,” some, indeed many, borrowers took on excessive amounts of debt. Once the credit bubble began to deflate—triggered at first by rising defaults by U.S. homeowners—other borrowers found themselves to be overstretched too.
The rapid implosion of the credit machine brought us the first wave of the crisis—the near-collapse of credit markets and financial institutions, and the foreclosure crisis in America. A sharp economic downturn then ensued, which, because of its severity and duration, has again highlighted other households and governments living beyond their means. Remember, it was only a short time ago that we were fretting about Iceland, German banks, U.S. commercial real estate, and Dubai.
Now it’s the Greek government’s turn. But as before, it’s not solely their problem. In Europe, for example, the Spanish economy enjoyed a fantastic growth spurt based on borrowed money and real estate speculation. (America, meet our financial-crisis cousins: Spain.) Back in the U.S., the economic crisis has also drawn attention to major fiscal imbalances at the state level. For some U.S. states, the problem is simply the economic downturn. For others, the problem is systemic: the well-known tendency of politicians to increase public employee pensions and health care benefits without raising taxes to pay for them. The financial problem “kicked down the road” has suddenly been kicked back to the present, courtesy of the economic downturn.
Think of the subprime crisis as the epicenter of the quake. The crises among the Greek, Spanish, and some U.S. state governments are all just the ongoing aftershocks—probably third-order aftershocks—of the great shrinking of the credit bubble. From my perspective, there may be one or two more minor shocks still to come. But where the problems are hiding, and when they will surface, is anyone’s guess.
Meanwhile, what should investors do? The short answer is nothing. Markets will always be volatile in the face of political or economic uncertainty. Greece is just the crisis du jour. Check your portfolio risk levels—and hang on.
Let no one repeat mistakes from the past, ours or anyone else’s mistakes, if its to good to be true its probably so, and let’s not forget, beware of Greek’s bringing gifts, bewise, be wary, be not hasty.
Well said !
This is great advice and sage analysis.
NC signed their state budget last night without fully funding the pensions………..muni bonds could be at great bubble risk…
Here is the problem: Every level of government is in the RED.
For others, the problem is systemic: the well-known tendency of politicians to increase public employee pensions and health care benefits without raising taxes to pay for them. The financial problem “kicked down the road” has suddenly been kicked back to the present, courtesy of the economic downturn.
Will the politicians ever get it? Will the voters ever get it? As long as voters look for spending coming in their direction, they will keep voting for representatives that don’t stand for fiscal responsibility. As long as we have lobbyists that are able to extract votes of our representatives in Congress in the favor of their cause, our future will not be bright. We have no control over other governments, but we can demand changes in our own. We need to re-visit some of the sage wisdom and unselfish attitudes of our forefathers not only this July 4 but every day. If we had more confidence in our politicians, we would have more confidenct in our markets.
Well stated!
Thanks.
I would not be too sure that only mild aftershocks will ensue. Although the U.S. will never be like Greece, the U.S. Federal Government will likely confront many of the same issues Greece has confronted. So far, Americans have not had to take austerity measures. The time will soon come when America has no choice. U.S. Federal Government spending and borrowing is unsustainable.
My Vanguard index funds have produced essentially zero returns over the past decade (less if I include tax and inflation considerations).
Wall Street brokers, movers and shakers, hedge fund wizards, investment bankers, and the like have extracted billions in the same time.
Would I be mistaken to conclude that the game is rigged against us?
What can be done to make the people in the government pay for pushing for the bad loans? Seems like they will not only get away, but others will be blamed for the problem they created.
We are going to Greece in Sep for two weeks,
What to expect?
Stay tuned
This is so well written and presented. I finally get it! Thanks.
The problems we face are worldwide, not limited to one country or region. From an economics standpoint, a major cause is the creation of “speculative bubbles.” However, no matter how we try to deny it, the root of the problem – just about all major problems – is one of demographics: human overpopulation. Decades of investing teaches us the truth of that old saying: “What goes up must come down.” The population bubble, like all bubbles, is overdue to burst and crash.
i’m sure people will remember the defauylt of argentina. we’re talking a whole country defaulting. well, hey paid its debt, iguess.so will greece do the same? so i imagine everyone got paid …right? so basically everything ill evenually righted. or did it?
California is on track to become the Greece of North America. It is a far larger economy and has comparable political disfunctionality. CA is dominated by a statist political mindset that owes it’s survival to public employee unions and an array of groups dependant upon government transfer payments. The revenue stream for CA continues to be highly reliant upon taxes that vary widely with the economy; revenues will be weak for the immediate future. High income retirees and small businesses are leaving or opting not to expand in CA. The systemic state deficit is approximately twenty percent and neither party is proposing a permanent fix to this state of affairs. If an insignificant economy like Greece can bring down the EU, imagine what a series of bond defaults by CA will do to the US. It is not a matter of if, but only a matter of when.
Thou shalt not lie. Thou shalt not steal. These are the unchanging rules of business, and government.
The major reason for global fear, is a complete melt down of ethics, and competency. This economic collapse, and the BP disaster in the gulf, did not occur because of flawed computer models, but because a string, not one, but many highly trained people, did not stand up, behind closed doors, and say, “No! This is wrong!”.
Some California retiree pensions were based, in 2009, on a DOW reaching 28,000. California is a lot bigger than Greece. Expect more shoes to drop, more kingdoms to fall. Some call this unfunded liabilities, others call it unrecognized risk, I just call it lying and stealing.
Debt in the face of a slow recovery from recession is not poor planning. Later, when the economy recovers is the time to increase taxes and reduce debt. Greece is a case of debt generation when taxation would have been appropriate with a booming economy; the opposite of intelligent managment.
The market is presently diving as a result of the G20 call for reducing debt by 50% while the recession is still in recovery.
Why say “some US states”? Why not spell out which states you have in mind?
I think you might add that the reason Greek debt has become such an issue is that Greece is on the Euro currency and therefore cannot just pay off the debt with their own national currency. Historically, when countries find themselves in over their heads with debt they just start up the printing presses and pay off their debt with newly created currency. Of course, this inevitably devalues the currency, but it is the only way to pay off the debt and avoid outright default.
It is defaults on sovereign debt that are the biggest potential problem, and to some extent the same issues that exist with sub-prime mortgage debt are in play with soverign debt. Here I refer to derivatives built on sovereign debt, specifically Credit Default Swaps (CDS). When soverign debt defaults trigger the payoffs from CDS, the big financial houses stand much to lose and therefore there is a lot of pressure to avoid soverign debt defaults at all costs.
But the european countries on the Euro currency cannot pay off their debt with newly created currency, and their only other option is to default on the debt in some way. How that plays out remains to be seen but we will probably see the first example in the next six months with Greek debt defaults.
THE GREEK FINANCIAL PROBLEM.
DID YOU KNOW THAT PEOPLE RETIRE AT 50 YEARS OF AGE, IN GREECE. I DIDN’T UNTIL MY FRIEND, BORN & RAISED IN GREECE, ENLIGHTENED ME. NO WONDER THEY ARE IN TROUBLE.
WE RAISE OUR RETIREMENT AGE FOR S.S. & HELP BAIL OUT THE GREEKS.
DOES THAT SOUND LOGICAL????????
IF YOU ARE WORKING FOR THE US GOVERMET YOU CAN RETIRE WITH 25 YEARS OF SERVICE AT THE AGE OF 55. IF YOU JOIN THE US ARMED FORCES AT THE AGE OF 18 OR 22 YOU CAN RETIRE AT 42 OR 44. SO WERE DO YOU FIND THE PROBLEM WITHE GREEKS RETIRING AT THE AGE OF 55? THIS IS ONLY GOVERMENT JOBS.CIVILIANS GOES TO THE GE OF 65!! JUST FOR YOUR INFO!!!BEFORE YOU SPEND TIME FOR NOTHING!
I think people spent money they didn’t have on things they didn’t need to impress people they didn’t like.
Well, well… crisis du jour? I think not. This is a 30 year in the making meltdown that will require the financial stars to realign. Better known in some circles as a Sea Change.
Let’s all get one thing straight; deflation is here, spawned by devaluing assets that are unwinding years and years of leverage. Hardly just another run of the mill crisis.
This will require people, and even fund managers, to take a good hard look at the macro trends that will play out in this deflation cycle – which promises to be longer than people want to admit. We need to stop pretending that we can turn the machines back on. (Homage to Trading Places)
So here is some advice. The World cannot be stimulated into spending what it can’t afford. The reason we are stalled is there is no growth. We will not have growth until we reach stop devaluing. Devaluing will not stop until we cut taxes, thus stopping the over spending cycle.
Until that happens, we continue trending down. The market will stay trading sideways.
That is the bad news. The good news is there is tons of cash out there getting ready to play. As soon as it gets near a perceived bottom, it will come in and buy. This is the beginning of the next bubble – of confidence. If will be a move that will play out well for a bit; so you can all profit form it, but then you will need to move on.
Right now, I agree, stay put. Selling in the downward trend is a panic move, and panicking is not wise.
All the “experts” seem so smart after the fact. If things were so bleeding obvious about the credit “bubble” and the financial shenanigans surrounding it, where were the advisors then, before we all lost 40% of our retirment portfolios ?
well written! Reader understandable and clear! thank you.
Your explanation is lame! If you want clients to truly understand the Greek crisis, and etc., refer them to the book by Liaquat Ahamed titled Lords of Finance: The Bankers Who Broke The World. I am an historian with years of reading behind me and can say with great enthusiasm that this book will explain it all in a very readable presentation. The financial era from 1914 through 1933 is very similar to the one we are now going through.
I think that financiers like Soros, Paulsen make the markets volatile by betting billions on Greeces economic and therefore state collapse. Did you forget to mention it?
thanks
With markets currently collapsing, don’t be surprised if some scary new debt crises surface.
useless words
We must do what our representatives seem unable to do; get and keep our houses in balance by reducing purchases, debts, and waste at home. Become aware of which representatives do a good job and which should be voted out. Maybe this is over simplification of the situation, but it works for me.
From my perspective there will be one more major aftershock.Really hang on.
Enjoyed the info Vanguard provided. But I have never seen a discussion describing what would happen if Greece were allowed to go bust. Why is the euro zone shaken in such a case?
I think Americans overlook the real crisis right here in America….the poor, uneducated (and lack of expectations), drug use, crime, and lack of financial knowledge and expectations…growing astronomically and very little attention to CORRECT these issues which put a growing strain on the government budgets and the state of the economy. This has become a part of so many people’s lives/extended families now that used to not be there. We have to take action to forces of better education including financial responsibilities and take massive action against the mind altering drug epidemics beginning with the very young and into the middle-aged damaged groups. These are real pressures on the economy and the government budgets. RESPECT, RESPONSIBILITIES, and APPRECIATIONS for the resources.
What you mentioned, “a low rate environment” is far from what happened. After divorcing my husband of 15 years and being FORCED by the banks to refinace a home already in my name so that he could be taken off and with a PERFECT credit record…the only choice I was given was to take a balloon loan that after two years went from 5.3% to 11%. I have the feeling that your opinions are based on things that you have read-not what really happened!
good, simple explanation