Tuesday, November 30, 2021

Greece is the Word



Darcie Guerin

“Complacency is a Problem.” ~ Ben Bernanke, Former Federal Reserve Chairman

Question: Can you explain the relationship between Greece and the European Union?

Answer: The European Union, also called the Eurozone (EZ), is an association of nineteen countries, including Germany, France, Spain, Italy, Portugal and Greece, among others. The common denominator of this union is a shared currency, the Euro, to provide an effective exchange rate system to facilitate ease of trade.

Today’s Greek drama focuses on the amount of debt that Greece originally brought to the union and continued to add to the balance sheets. As one of the smaller players, the gross domestic product (GDP) of Greece is about the same as that of the entire Miami-Dade County area or the State of Connecticut. How the Eurozone handles the situation matters far more than the actual size of the debt.

When Greece joined the EZ in 2002, the hope was to modernize the country and reduce their debt load. Swapping the drachma for the euro allowed Greece to borrow money at a lower cost, and they did. Europe lent billions and billions of euros to Greece, at last count the total was 323 billion euros (352.7 billion dollars).

As a whole, Greeks are an industrious lot, working an average of 2,037 hours per year, in contrast to 1,388 hours on average by Germans. Even with this fact, the country continues to spend far more than it generates in revenue and taxes. Without a manufacturing base or natural resources to export, Greece relies on tourism and taxes as its main sources of revenue. Prior to 2008 and the worldwide financial crisis, Greece was attempting to reduce their debt.

Following the global slowdown, Greece was forced to add to, extend and refinance existing debt as their economy dramatically shrunk. This was the end of easy money and liquidity.

Now time has run out on the easy money and liquidity. The lenders are known as the Troika, which is a committee consisting of three organizations: the International Monetary Fund (IMF), European Central Bank (ECB) and the European Commission (EC). They are the lenders of last resort who stepped in to lend money to Greece when no one else would. The question is, how long can this continue?

The lenders are frustrated because there is no end in sight and they don’t see realistic solutions to the growing problems are which measured in debt-to-GDP ratios. To explain, consider a family with combined net earning power of $100,000 annually with debt levels in the same amount; their debt-to-GDP ratio would be 100%. In contrast, the original threshold set by the Eurozone for an acceptable debt-to-GDP ratio was 60%. Greece’s ratio is currently at 168.8%.

Following 2008, several countries, including Greece, needed help. Most of these countries have shown progress in reducing their spending and increasing income. Understandably, individual countries like Germany along with the “troika” are worried that they won’t be repaid by Greece and are concerned that leniency may set a precedent for other at-risk countries also carrying high debt loads.

This analogy may help to illustrate the relationship between Greece and the Eurozone, and specifically Germany who is Greece’s largest lender. Think of Angela Merkel, the Chancellor of Germany, as a stoic single Mom. She’s trying her best to raise 19 children who each bring some financial and/or emotional instability to the family. How Mom handles the Greek Drama in particular is important because the other kids are watching. Will Angela and her extended family (the troika) continue to bail out their free-spirited teenager (Greece) or impose austerity? The value of the entire family’s currency is at risk as confidence in Greece is slipping. Onlookers fear that the Greek phenomenon may be contagious.

Greece is receiving emergency loan assistance to grease the wheels of commerce allowing the country to function temporarily. Greek banks that closed June 28, 2015 have reopened on a limited liquidity basis. Their stock market closed on June 29 and at the time this is being written, it remains closed. Other countries and corporations are understandably reluctant to lend money or ship goods to Greece without a payment source in sight, requiring the equivalent of cash-on-delivery or COD for imports of food and drugs.

“Everybody, sooner or later, sits down to a banquet of consequences” is a quote by Robert Louis Stevenson. Taking on new debt to retire old debt is not a realistic solution for Greece. The world is watching and waiting to see how the European Union will deal with Greece’s unsavory debt load. A sustainable deal on Greek debt is necessary for market and political stability as the Eurozone strives to put the balance back in its balance sheet.

The global economic system can be fragile. International investing involves additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability. These risks are greater in emerging markets. Greece will likely remain a recurring headline issue for financial markets. For investors, quality matters. Stay focused and invest accordingly.

The opinions expressed are those of the writer, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”


This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. Call or email Darcie at (239)389-1041 or darcie.guerin@raymondjames.com with questions or suggestions for future columns. Visit her website: www.raymondjames.com/Darcie.



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