Greece is the Word

Is Greece on the road to default?

Photo: © Martina Misar-tummeltshammer Source: Dreamstime Stock Photos

When I consider Greece I think of classical literature and ancient ruins. Others picture sparkling beaches and whitewashed architecture. We usually don’t imagine a bustling commercial center. And it’s unlikely that we look at Greece as the key to the Euro-zone’s financial stability. But that’s what’s in the news.

Greece is deeply indebted. The government has borrowed the equivalent of 175% of its economy. This means that just to pay the interest on these loans they have to devote over 5% of their GDP just to service the debt. In an economy that is barely growing, this is not sustainable. In the past, the Europeans and IMF to whom Greece owes the money would extend these loans in exchange for certain reforms. But the Greek people aren’t as willing to sell off public companies and change their labor laws at the behest of their creditors any more.

Source: Wikipedia

One option is for Greece to leave the Euro. That would allow them to depreciate their currency and become more attractive both as a tourist destination and source of cheap labor. But that would cut Greece off from the European banking system. The resulting credit crunch would probably send the Greek economy into a deep depression.

Another possibility is a simple default by Greece while it stays in the Euro. But if they refuse to pay their national debt, a lot of domestic institutions would become insolvent. That has significant implications as well. And there are geopolitical dimensions. Greek Prime Minister Alexis Tsipras recently met with Alexander Putin. Could Russia provide some needed cash in exchange for strategic considerations? China is investing in the Port of Piraeus, outside Athens. Things could get complicated.

In the end, Greece’s economy is less than 2% of the Eurozone. It’s about the size of Louisiana. It exports gasoline, packaged drugs, and not much else. It is in Europe’s interest to make sure they stay in the Euro—to support the currency union and avoid broad financial contagion. But Greece needs two things—a sustainable debt structure, and some sort of support for its domestic industries. The Greek people just won’t let German bankers determine their economic priorities.

In the past, ECB President Mario Draghi has said that he will do “whatever it takes” to save the Euro as a common currency. These days, that means clearing the road that is keeping Greece’s economy back. Let’s hope he can pull it off.

Douglas R. Tengdin, CFA
Chief Investment Officer
Phone: 603-224-1350
Leave a comment if you have any questions—I read them all!

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By | 2017-07-17T12:22:58+00:00 April 22nd, 2015|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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