A Part II Primer to The Big Fat Greek Economic Meltdown
Original Post Dated May 2010
This is important stuff to know for American companies involved in exporting, to know the financial situation of international markets, and what market realities your business partners (and competitors!) overseas are facing. Knowing this will allow you to engage more effectively when you participate at one of our trade shows in Düsseldorf.
|When in the 2002 heater hit movie My Big Fat Greek Wedding the father of the bride Gus Portokalos (adroitly played by Michael Constantine) is confronted with any kind of skin ailment, he pans, "Put some Windex." Somehow that humorous expression strikes me as somberly befitting for this week’s economic developments in Europe where its leaders agreed on a so-called “Windex-Fix” that would impose steep losses on investors holding troubled Greek bonds while simultaneously boosting the effectiveness of the region’s bailout fund.
Michael Constantine / My Big Fat Greek Wedding
A Grand Plan
Under the agreement reached in Brussels in the wee hours of the morning, Greek bondholders agreed to voluntarily write down the value of Greek bonds by 50%, thereby reducing the nation's debt to 120% of GDP from 150%. The private sector [read: mostly European banks] agreed to the write downs on the condition of a € 30 billion contribution from the public sector [read: European tax payers].
At the same time, the bailout fund (known as the new European Financial Stability Facility) would help cash-strapped countries like Spain and Italy borrow at least € 1 trillion by providing a kind of insurance that would make their bonds more attractive to investors – and thus hopefully preventing them from eventually experiencing a similar fate as Greece.
So why is this important?
New York Times columnist Bill Marsh recently prepared a remarkably interesting article and flow chart putting the entire complicated situation into a clearer and simplified perspective:
At one time, investors viewed lending to the Euro Zone as risk free. But Greece was borrowing more money to finance itself than it could afford to repay. Similarly, but to a somewhat lesser extent, other countries in Europe (Ireland, Portugal, Spain, and even Italy) were finding themselves sliding down a similar path. With investors sensing that bond yields would not be met, it looked increasingly possible that the contagion could spread elsewhere – resulting in more difficulty for these countries to borrow money to pay their bills, and risking the investors (i.e. European banks) bottom line: a resulting recipe for huge financial losses, European credit markets to lock up, and certain European financial meltdown to follow. The shockwave would be felt worldwide – yes, here in the United States.
Is this “putting Windex” treatment going to work?
Marsh hypothesized that Greek debt will continue to grow and that eventually an orderly, negotiated default will occur, which will ideally be contained thanks to the above mentioned agreement reached in Brussels – and which would shore up the credit of the other countries Ireland, Portugal, Spain and Italy and thereby save the Euro currency and financial collapse of the Euro Zone.
At the moment, it appears an imminent crisis has been averted. But of course, time will tell.