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A funny thing happened on the way to the forum…

Oops, I meant the bank... 

Greece is considered the cradle of Western Civilization and Athens the birthplace of democracy.   But now, Greece is becoming famous for less impressive things than being the birth place of Homer, Socrates, Plato, Aristotle, Alexander the Great and Cleopatra. 

The oldest civilization is broke.  Last year, Greece was unable to pay the interest due on its Government debt and almost defaulted.   The World Bank came to its rescue by providing Greece a massive loan equal to about $157 Billion.  Without this loan, the country would have been unable to make interest payments last year to its bondholders (i.e., banks and private investors)

Talk about the ultimate “upside down” mortgage!  Greece's national debt as a percentage of the size of its economy was 140% in 2010 and is projected to be 160% in 2012.  Could you imagine owing one and half times your annual salary to lenders?  By comparison the USA's national debt as a percentage of the size of our economy was 62% in 2010 and is projected to be 74% in 2012. Maybe the problem is becoming clearer?

Here’s the catch and why we should be very concerned in Any town, USA… in order to obtain its loan, Greece had to agree to tax increases and spending cuts to reduce the size of its projected annual deficits. The austerity measures implemented by the Greek government (i.e., tax increases and spending cuts) have had a devastating impact on the financial system of Greece. The Greek economy contracted by 4.5% and the country's unemployment rate rose to 13.9%. Greece is now in the 3rd year of a recession, go figure?

If you’d like to earn more than 20% interest owning a Government bond, then go Greek.  The yield on the Greek 3-year note was 25% and the yield on the 10-year note was 16%!  But because of their really bad credit (I’d hate to see their FICO score) and the chance of getting the interest or the principal back is only a 50% gamble. Thus, Greece has been virtually unable to borrow more money.   And the real concern is if Greece defaults and want a big “do-over,” so would Ireland and Portugal (both countries received bailout loans in the last 8 months).  Talk about your classic cliff hanger?

Now tens of thousands of Greek citizens have been rioting against the austerity program and who could blame them?  Greek businesses are being forced by its government to offer early retirement packages to 580 different private sector jobs, including jobs like hairdressers and radio hosts!  This just adds more to corporate debt levels (source: NY Times).  Is this the death spiral contraction event the doomsayers have been looking for, like Linus waiting for the Great Pumpkin to rise in the pumpkin patch?  Will this Greek Tragedy and comedy of errors flow over to our shores?  Hopefully not but in the interim please fasten your seat belts and bring your seat back to their upright and locked position. 



Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.