Tag Archives: Eurozone

The Latest from Greece

Screen Shot 2015-08-07 at 8.54.19 AMWhile negotiations on Greek debt continue to be mired in uncertainty, the Greek banking system is taking a daily pounding.  And you can understand why.  If Greek representatives were to suddenly walk away from the table and leave the Eurozone, the country would have to print its own currency (Drachmas), which would almost certainly be worth less against the Euro from day one.   In order to pay its creditors, the Greek government might have to keep the presses working overtime, which means that the poor Greek citizen who left his money in a Greek bank would watch helplessly as his Euros were automatically exchanged for a currency that would be at least 30% less valuable.  Better to take the Euros out now and keep them under the mattress until the negotiations work themselves out.

This may be a wise strategy for individual Greeks, but it’s terrible for a banking system that relies on deposits in order to make loans and, more basically, remain solvent.  Meanwhile, Greek negotiators are trying to stave off German demands for austerity, arguing that the country has already experienced the worst recession in Eurozone history, and stocks have fallen to roughly the level they were at in 1990.  If the past five years of austerity has produced this kind of results, they argue, then perhaps a different strategy is in order.

The banking situation has complicated these negotiations, since international observers now believe that the banks may need an infusion of as much as $27.5 billion to remain solvent—before the next day’s lines at the ATM machines.  That means negotiators are now talking on two fronts; debt relief and recapitalization of the lending system that is the nerve center of any economy.

Will you be affected?  For most U.S. investors, the Greek tragedy is simply a spectacle to tell your grandchildren about.  Greece will survive, eventually the money will come out from under the mattresses, and Europe as a whole might find a way to be more accommodating when one of its own gets into financial trouble.

Sources:

http://news.yahoo.com/greek-banking-stock-plunge-again-debt-crisis-dominates-082744811–business.html

http://www.huffingtonpost.com/jakob-von-uexkull/from-greek–to-euro-crisi_b_7926532.html

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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The Brink of Grexit

grexit

Well, the Greek voters were asked, once again, whether they would accept additional austerity measures that were demanded by their creditors, including the European Central Bank, the International Monetary Fund and the European Commission.  And once again they voted—this time overwhelmingly (61.31% to 38.69%)—to hunker down and move the country to the brink of a Grexit from the euro currency.

Their choice may not have been hard to make.  Virtually all of the $264 billion that has been loaned to the Greek government have actually been paid to the European banks who unwisely loaded up on Greek debt before 2009—and the loans and extensions, to them through Greece, has kept the European banking system solvent during the crisis.  Virtually none of that money has gone back into the ailing Greek economy.

Over the past three years, the Greek government, following many of the demanded austerity measures, has actually reached the point of budget surplus, aside, of course, from the debt repayments.  The cost: a skyrocketing unemployment rate that has reached 25.6%, including 60% of the nation’s young workers, and a steep recession which economists seem to agree would only get steeper if the country accepts the austerity demands.  The Greek economy has shrunk by 25% over the last five years.

But the hardship continues.  Anticipating a shift from euros to drachma, Greek citizens have staged the mother of all bank runs, trying to get as many euros out of the system as they could before they were exchanged for lesser-value drachmas.  The government limited the amount of their own money that citizens could withdraw to approximately $67 a day, and has now shut down the Greek banking system at least through end of day Tuesday.   Reopening the banks could be problematic, since they don’t hold nearly as many euros as depositors have put into them.

Some are betting that the European Central Bank will provide guarantees and financial support to keep the banks from collapsing and taking the Greek economy down with them.  But you can expect Germany to push back hard on this idea.

Will Greece leave the Eurozone?  Nobody knows, but the vote suggests that the citizens of Greece have had enough of European (read: German) control over their economy and political decisions; indeed, some observers saw the extremely hard line at the negotiating table as a ploy to destroy Greek’s ruling Syriza party by forcing Greek voters to abandon it.  There are sizable numbers of people in other European countries who feel the same way about losing control over their own affairs, who are closely watching how the European Union responds.

The discussions will be tricky.  If the European Union offers further concessions, then you can expect Spain (unemployment rate: 23.1%) to ask for less stringent austerity and some space to get its own economy moving again.  Portugal could be next.

And, of course, if Greece leaves, and begins to experience economic growth again, then those citizens in other countries could demand that their leaders also cast off the layer of oversight and control coming from Brussels.

What should you watch for?  Greece is already technically in default as of Tuesday, on $1.7 billion in payments.  At the end of July, it will own the next payment, in the amount of just under $4 billion.  One compromise possibility is that the European Union, led by Germany, will reluctantly allow Greece to extend its payments, and also put together some kind of an aid package for the Greek economy that would help it become more able to make payments in the future.

How does this affect you?  Once again, you’re going to see turmoil in the markets, and a temporary decline in the value of the euro on international markets.  You’ll hear pundits and economists speculate about the “fate of the Eurozone,” and eventually, one way or another, everything will settle down again without affecting in any way the underlying value of the stocks you own.  We’ve all seen this crisis a few times before, and each time the predictions of some form of doom haven’t come true.  This “crisis” is very real to the Greek people, but the world will go on no matter how it’s resolved.

Sources:

http://finance.yahoo.com/news/greece-says-oxi-heres-happens-180726938.html

http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0

http://www.nytimes.com/2015/07/06/business/international/eurozone-central-bank-now-controls-destiny-of-greeces-battered-banks.html?rref=business/international&module=Ribbon&version=context&region=Header&action=click&contentCollection=International%20Business&pgtype=Multimedia

http://www.nytimes.com/2015/07/06/business/international/eurozone-central-bank-now-controls-destiny-of-greeces-battered-banks.html?rref=business/international&module=Ribbon&version=context&region=Header&action=click&contentCollection=International%20Business&pgtype=Multimedia

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

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The Next Bailout

It has been five years since the newspapers exploded with stories of the Greek debt crisis, which, we were told, threatened the very existence of the Eurozone.  Eventually, a variety of bailout packages were negotiated, and things seemed to return to normal.

As it turns out, the current rescue package will run out at the end of June.  The European Union finance ministers and leaders of the newly-elected Greek government appear to be far apart in their negotiations on extending the bailout.  The European Central Bank, International Monetary Fund and the European Commission have demanded that Greece institute another round of economic reforms, meaning austerity in government spending and services, higher value-added taxes, pension cuts, and a continuing decline in the Greek GDP and standard of living for ordinary citizens.  The citizens, naturally, have been reluctant to endure any more pain, and elected leaders from the Syriza Party who ran in opposition to any more austerity, promising instead to cut a better deal, spend more and generally use Keynesian economic theory to restart the economy..  The Greek government recently rehired 4,000 public sector workers in a clear display of independence from the creditor demands.

Greece’s finance minister has agreed to make the next 750 million euro loan repayment to the International Monetary Fund, which staves off immediate default.  But there is no question that the country will have to refinance 172 billion euros of debt.  No deal means default and, possibly, what people are calling a “Grexit” from the Eurozone.  You can expect to suddenly see headlines about the looming “crisis” and once again hear intimate details about the financial situation in Greece.  If the negotiations succeed, and Syriza officials win concessions, it could bolster the strong anti-austerity populist movements in Spain, Portugal and Ireland.

Should you be concerned?  If you’re holding a private stash of Greek bonds, or are receiving a government pension from the nation, then you should be following these developments closely.  If not, then there is nothing about the negotiations which will change the underlying value of European stocks and bonds in most American portfolios.  The headlines could cause a selloff, particularly in the event of a Grexit, but corporate earnings and valuations will ultimately prevail, whether Greece is given a grace period, whether it remains part of the Eurozone—or not.

About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years.  Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.

Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association. 

Sources:

http://www.ft.com/cms/s/2/7f31597a-f4cd-11e4-abb5-00144feab7de.html?ftcamp=published_links%2Frss%2Fhome_us%2Ffeed%2F%2Fproduct#axzz3ZV6PABAZ

http://www.huffingtonpost.com/rj-eskow/13-questions-about-greece_b_6621708.html

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