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Greece is the Word, and So is Bailout

May 4th, 2010
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05.04.2010 original publish date
10.04.2012 cleaned up HTML

Image: Policemen try to escape a fire from a petrol bomb [Image Credit: Reuters]

Greece is the Word, and So is Bailout

original article written by Net Advisor

I have long discussed concern about the continued economic risks, especially in banking and real estate, since 2007 this includes foreign markets.

Even though the U.S. had a huge technical rally since March 2009, the rest of the world is not in the same position. Not every country can “spend their way out of debt.” Read that one again. That is an issue also a risk to the U.S. which I have repeatedly cited here. The risk may not be immediate, but the risk will come up again as long as the U.S. continues its trillion+ dollar a year deficit spending.

As for Greece and the news, most people don’t seem to get it. The talk is all that. Talk. Rumor has no basis. You can’t accurately report and say that a there is a fire (economic problems) one day, and then report the next day that there is no fire (or it’s handled). Was there a fire or not? Are the problems solved or not?

Does Greece have economic problems? Absolutely.

Are the problems contained? No.

Can Greece’s problems spread to other countries? Absolutely.

Will it? Maybe.

I give it a better than even chance. I will say that there is a high probability risk that extends to all the so called “PIGS” – Portugal, Ireland, Greece and Spain (PIGS).

Some people include Italy in this economic scenario as “PIIGS” and even Great Britain as “PIIGGS.”

These are not my acronyms, and this is not new. Someone coined these terms referring to severe on-going economic crisis in these counties.

So why is Greece having economic problems?

According to a report by the BBC, “the Greek government went on something of a spending spree and public spending soared. Now, it is suffering from its huge spending – and widespread tax evasion – as it finds itself unable to cope with its huge debt loads and meet EU deficit rules. Greece’s deficit is, at 12.7%, more than four times higher than European rules allow.”

“With any debtor, there is a chance they will not be able to repay their debts. These figures in the above graph express the likelihood as a percentage called the Cumulative Probability of Default (CPD)…sometime over the next five years.” (Source: BBC)

The Greece bailout to be funded with IMF and EU money.

According to a report on CNBC-TV (04-29-2010, “Squawk on the Street” program), Portugal will pay about 800 million Euros to bailout Greece. This is about 1/2% of Portugal’s GDP.

Every EU member country will have to pay a percent of their GDP to bailout Greece. The bigger the GDP, the more you pay. This is why Germany is not happy. Germany is a leading EU economic country with a big GDP. Thus tax payers in Germany will have to pay more to bailout Greece, etc., than people in lesser economically advantaged counties will have to pay. Few people pay taxes in Greece, and the Greeks believe it is their right not to pay any taxes, which is upsetting to all the other counties whose people do have to pay taxes. No one really wants to bail Greece out.

According to the same CNBC report, Spain will have to pay about 4 Billion Euros to meet their required GDP part to bailout Greece.

Portugal will also have to pay a percentage of their GDP.

Here is the funny part.

Portugal is either going to need to borrow money to pay Greece, and or Portugal will need a bailout after their bailout contribution to Greece.

This is how these socialistic systems work. They have nothing to do with making financial or economic sense. They are all about keeping everyone even financially. Obviously that has not worked too well.

Cause for Concern in Growing Global Government Debt

Again after Greece, Portugal is likely to be next in line for a bailout and Spain would then likely follow. The risks in these global EU markets are material. The risk may not impact the U.S. economy directly, but they can impact global markets and thus impact U.S. financial markets, and that result can impact the U.S. economy.

Don’t be surprised if you hear the Obama Administration come out and make some financial concession to Greece, or other EU counties if the issue weighs over U.S. markets. If this happens, this is a guaranteed way to get a lot of Americans upset. I’m sure he will blame Goldman Sachs and President Bush for Europe’s own financial mismanagement.


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