Day #349: What’s The Deal With Greece?

You may have heard rumblings recently in the financial press that some folks aren’t too happy with Greece these days.  Often, there is a significant event in another country and we either fail to pay attention or realize its importance.  These days, we all need to understand that we really do operate in a global economy.  That means that it would be useful to have at least a passing understanding of international current events because they do ultimately affect everyone else.

Case in point:  Greece

 Greece’s debt burden is giving a lot of folks heartburn these days.  Greece is having a hard time paying its bills and needs a helping hand.  However, in order to get financial aid, the Greek government has to agree to budget cuts on top of the ones that they have already implemented.  The government is resisting, the people are rioting and tomorrow the government faces a confidence vote.  Confidence votes are typically more symbolic than anything else, but they send a strong message about what people think about their leaders.  In fact, just getting to the point where a confidence vote takes place is a strong sign of discontent.

So What?

Why should folks in the U.S. and other countries care if Greece can’t pay their bills and the Greek citizens are unhappy with their government?  Heck!  The U.S. gross domestic product (GDP) is nearly 50 times that of the GDP of Greece!  Still, it matters.  If Greece can’t repay their debt (which is nearly impossible without some help), this means that banks who hold Greek bonds would suffer losses and that would lead to tough times in the already shaky financial markets.  Most of the debt is held by European banks, but recently Republican senators C and C expressed their concern to Fed Chairman B about U.S. holdings and their exposure to potential default in Europe.  It turns out that the U.S. has nearly $200 billion in direct and indirect exposure to the debt of Greece, Ireland and Portugal.  It’s almost like learning that the business opportunity you invested in is on shaky grounds.  You knew there was a potential that you wouldn’t get your money back, but you never thought it would happen.  If Greece can’t repay their debt, European and U.S. banks will suffer fairly significant losses that will ultimately trickle down to individual investors.  The immediate impact, however, will be a drop in the stock markets.  Investors are cautious with the uncertainty regarding Greece.  In a way, this is good for U.S. Treasury securities (T-Bills, Notes and Bonds) as investors flee some of the uncertain European markets and seek credit quality.  Unfortunately, the U.S. is still embroiled in a debt ceiling debate that has created a possibility for credit downgrades here as well.

The Bottom Line

The bottom line is that Greece can’t pay its bills without a little help from their wealthy friends.  To get that help, they’ll have to make some tough concessions.  Financial markets around the world are anxiously waiting to see how this all plays out although most folks think that the Greek government will get the financial aid it so desperately needs.  This all makes it just a little harder for our ailing economy to rebound.  Investors need to feel good about where both domestic and international markets are going.  With trouble brewing in Europe and at home, it’s tough to get excited about investing these days.

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