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One of my favorite market analysts is John Mauldin. A few weeks ago he wrote a letter to his kids explaining how Greece might affect them. I thought the letter was both informative and interesting to read. Here is the link.
The meat of his letter is here:
Why is Greece important? Because so much of their debt is on the books of European banks. Hundreds of billions of dollars worth. And just a few years ago this seemed like a good thing. The rating agencies made Greek debt AAA, and banks could use massive leverage (almost 40 times in some European banks) and buy these bonds and make good money in the process. (Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)
Except, now that Greek debt is risky. Today, it appears there will be some kind of bailout for Greece. But that is just a band-aid on a very serious wound. The crisis will not go away. It will come back, unless the Greeks willingly go into their own Great Depression by slashing their spending and raising taxes to a level that no one in the US could even contemplate. What is being demanded of them is really bad for them, but they did it to themselves.
But those European banks? When that debt goes bad, and it will, they will react to each other just like they did in 2008. Trust will evaporate. Will taxpayers shoulder the burden? Maybe, maybe not. It will be a huge crisis. There are other countries in Europe, like Spain and Portugal, that are almost as bad as Greece. Great Britain is not too far behind.
The European economy is as large as that of the US. We feel it when they go into recessions, for many of our largest companies make a lot of money in Europe. A crisis will also make the euro go down, which reduces corporate profits and makes it harder for us to sell our products into Europe, not to mention compete with European companies for global trade. And that means we all buy less from China, which means they will buy less of our bonds, and on and on go the connections. And it will all make it much harder to start new companies, which are the source of real growth in jobs.
So, watch the news. Greece is in crisis this week.
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Not to be overly pessimistic, but I agree that eventually Greece will fail and that the bailout packages are just forestalling the inevitable. I also think that there will be a domino effect throughout Europe and all of the countries on the edge - like Spain, Great Britain and Portugal - will fall into similar crises. In my opinion, the recession is far from over, in fact I think it's just beginning.
ReplyDeleteThis is scary to think about. I don't know if the bailout will fail miserably, but I hope it will actually help. With the restrictions the U.S. are trying to put on Greece through the IMF I think it will help, but the article is right when it says that Greece will have to go into their own "Great Depression." I don't see Greece willingly cutting their spending and increasing taxes.
ReplyDelete"(Don’t ask Dad why people still trust rating agencies. Some things just can’t be explained.)" I literally laughed out loud when I read that. But seriously, I think this whole crisis may affect the way we all think about these things very differently. AAA used to mean something. Will it in the future, I doubt it.
ReplyDeleteI would like to think that by Greece getting bailed out that it will help there situation. I think they just need to start acting on what they are going to do. I agree with Chloe when she said if Greece fails there will be a domino effect but I hope that they don't fail cause if they do its gonna be ugly for Europe.
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