The Greek Crisis

A number of clients have expressed concern over the latest round of the EU –Greek debt negotiation. Is this going to result in a default which will drop stock and bond market prices worldwide?

This epic saga has gone on so long because the EU has done everything in its power to convince and cajole the Greeks to stay in the monetary union.

The Greeks for their part are happy to pay interest on their debts as long as someone gives them the Euros to do so.

The fact is they owe a total of $353 Billion dollars’ worth of Euros at today’s exchange rate of 1.12 Euros per US dollar.

Almost 75% of this debt or $264.75 Billion is owed to the International Monetary Fund and the EU itself. Those two institutions are Central Banks not commercial banks. They can print and lend money as they wish and their charters allow.

Neither the EU nor the IMF will go broke if the Greeks don t pay back what they owe. The big secret is they can’t afford to pay back this money.

Recently the EU has loaned the Greeks the cash to pay interest on the IMF loans. Some think an alternative, answer to this crisis is a 100 year Greek bond issued at low interest rates. I say why bother? These stalling tactics are now being ridiculed as preposterous by most observers.

This charade is about to end unless the Greeks get a better deal than the EU has offered to date. The Greek government refuses to negotiate a higher retirement age for their public workers which I believe is now 55 years of age. They want to keep their bloated public sector as it now is, fat and happy. They will accept no further cuts whatsoever and seem resolute. Hardworking Germans and others say no more. Poorer countries in the East of the Euro Zone say they can’t afford to pay Greek pensioners more than their citizens are getting.

So that leads markets to fret about the additional $88 Billion dollars owed to private individuals and institutions if the Greeks exit the Euro.

Here is a brief overview to put this matter in perspective:

• The Greeks are only 11 million people and had a $241 Billion GDP in 2013 or 0.39% of World GDP. 
• Entire Euro Zone had a$ 12.7 Trillion GDP in 2013.
• Tiny Switzerland had a $651 Billion dollar GDP and the USA had $16.8 Trillion GDP in 2013. 
• By way of further reference, Apple Computer has a stock market value of $735 Billion, Microsoft $372 Billion, Exxon $354 Billion, Berkshire Hathaway $342 Billion, Wells Fargo Bank $294 Billion, GE $ 274 Billion, Johnson & Johnson $ 273 Billion, Procter and Gamble $215 Billion, IBM $164 Billion, Intel $150 Billion and Cisco Systems $146 Billion. 

                             This is much ado about nothing, to paraphrase Shakespeare! 

The European Central Bank Chairman, Mr. Mario Draghi has indicated they are prepared if a default occurs. That means the Central Bank will keep liquidity flowing. They have a massive QE bond buying program of 60 Billion Euros per month in place.

Euro Zone interest rate rises will be kept in check with Central bank buying.

Spain, Italy, and Portugal will not bolt the Euro and this crisis will be over for most except the Greeks and their private bondholders.

There is not a huge amount of leverage tied to this Greek debt. Where it does exist investors holding this debt will be hurt and possibly wiped out. The system will be cleansed.

The Greeks get a fresh start with a new currency and may actually become more competitive.

The former CEO of PIMCO Mohamed El Arian puts the probability of default at 55% as of today.

Markets may react negatively at first but will return to normal .Our focus is on slow 2-2.5% GDP growth and corporate earnings.

The Sun will rise in the East!

Doug Coppola

John Coppola

June 16, 2015

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