The Fact of the Matter Is, Greece Is Insolvent

rodneyIf you lent a guy money and he failed to pay you back, would you lend to him a second time? How about a third time?

That’s exactly what’s going on in Europe.

The European Central Bank (ECB), European Commission (EC), and the IMF – the three entities collectively known as the Troika – bailed out Greece in 2010… then again in 2012.

All told, Greece received 216 billion euros, and defaulted on a chunk of debt to private investors. Now the Greeks are back at the bailout door, hoping to finalize a deal before their next debt payment is due on July 1.

The ECB and EU have agreed to more austerity in Greece in exchange for just under 100 billion euros of bailout bucks, but the IMF is holding out. Officials at the international bank don’t think Greece can make good on the new promises. They want remaining creditors – like the ECB and central banks across Europe – to discount their Greek bonds instead of asking for budget cuts from the ailing country.

I’ve got a question. What difference does it make?

Even though Greek lawmakers agreed to more spending cuts and taxes over the weekend, it doesn’t change the facts on the ground.

Greece is insolvent.

The country generates a very small primary surplus, meaning it has a little bit of cash left over before it pays principal and interest on its debt. But the country owes more than 370 billion euros. That’s like saying you have a little bit of cash left over before you pay your mortgage or rent.

And why would the Greeks want more bailout bucks? Of the 216 billion euros they received from the first two rounds, a whopping 9.7 billion euros flowed to their coffers. A chunk of it, 90 billion, repaid old debt, and the rest flowed back to bondholders in the form of principal and interest payments.

So for 126 billion euros of net new debt, Greece received 9.7 billion of fiscal stimulus.

Brilliant!

The Troika, on the other hand, have no choice.

They must force another bailout, because they all own Greek bonds. Same with the central banks of Germany and other Northern European countries. They all need Greece to continue paying its debts, because they are the recipients of those principal and interest payments. If the Troika cuts Greece off, they’ll have a bankrupt nation on their hands that cannot continue to pay them.

No one in the Eurozone wants that.

As Charles recently noted, Brits will vote in late June on whether to stay in the European Community or cut their ties. The possibility of losing the financial capital of Europe is already sending tremors through the economic bloc. They don’t need another earthquake.

But Greece’s troubles aren’t going away. They’re just getting older.

A full 25% of the government’s budget goes toward pension payments. Since 2000, the government has spent over 175 billion euros on pensions, which is about half of its outstanding debt. If the country completely abandoned its current debt, it could just barely squeak by today.

But what about tomorrow? As more pensioners join the ranks, the problem will only get bigger.

As I’ve written many times, the country is already bankrupt. It’s just a matter of when everyone will acknowledge the fact and start working on real solutions.

Until then, expect more bailouts and Band-Aids as the Troika tries to keep Greece afloat so the Eurozone doesn’t splinter.

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Rodney

Follow me on Twitter @RJHSDent

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About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.