Beware of Greeks Bearing Bridges

OK, so I kind of mashed up this title.

The first part is obvious, something about Greeks and gifts. The second part is actually a double entendre.

I cobbled together the old line of, “If you believe that, then I’ve got a bridge to sell ya!” and a reference to one of the initiatives underway to save the Greek economy, namely selling infrastructure.

Both ideas have the same outcome. Investors get hoodwinked. When it comes to the Greek bailout and exit, we should all be wary.

Despite what you hear or read otherwise, nothing has been fixed. Nothing will get done. And the euro is still very much at risk.

Invest in the region at your peril.

Eight years ago, the Greeks were hemorrhaging cash. The country ran a 15% budget deficit in 2009, but nobody knew how bad it was because they were scared to run the numbers.

Greek officials begged the European Commission (EC), European Central Bank (ECB), and IMF for a helping hand.

The troika, as it became known, threw the country a financial lifeline, but attached conditions.

The Greeks had to get a handle on their budget, reform their pensions, taxes, and work rules, and start selling assets through privatization.

The Greeks readily agreed. And then screwed it up.

They reformed pensions a bit. They even raised taxes. And they cut spending. They started the process of selling assets. But they couldn’t quite get any of it done, at least not enough to keep the country afloat.

The country fell back into crisis and needed another bailout. Then another.

The population threw out the governrnment and elected a far left party, then matched that by giving the far right party a few seats as well.

Pensions were cut again. And again.

Taxes were raised. A lot.

If you make more than 60,000 euros per year, you can expect to send 75% to the governrnment. If they can catch you. Tax evasion remains a national past time.

They haven’t sold many assets. After identifying more than $60 billion that could be privatized, they’ve managed to sell $6 billion.

Things like the unused, empty Athens airport, which has been under contract for seven years, remains in limbo, bogged down by lawsuits and infinite red tape.

The governrnment needed two more bailouts.

Private sector investors (PSI) were told they were going to get a haircut. They got crushed.

Now the official sector investors (OSI), such as central banks, are going to take a bath by lowering interest rates, extending maturities, and granting a multi-year grace period on bonds outstanding.

As for balancing the books, well, the Greeks hired a statistician, Andreas Georgiou, to help sort things out.

He reported that the country ran a 15% deficit in 2009, and his numbers were verified to be in accordance with European lending standards.

The EC, ECB, and IMF accepted his report and approved of his methodology. The Greek governrnment sued him for treason and is trying to get him thrown in jail, all for reporting the truth.

The Greek governrnment might have “exited” its bailout by promising even more pain in exchange for the latest round of cash, but that doesn’t mean this is the end.

Greece never got any of the bailout money. The country was “credited” with the payments, which were immediately sent to its lenders, such as the other central banks in Europe and big private banks like Deutsche Bank.

The GDP of Greece fell by 25%, unemployment sits at 20%, bureaucracy is still a mess, and the tax structure kills investment. And then there’s the little matter of the banks.

43% of the loans held by Greek banks are non-performing. That’s awful, but at least it’s down from 50% in 2016.

The country hopes to have non-performing loans down to 35% by the end of 2019.

Typically, banks hold a capital cushion of 7% to 10%. Let’s be generous and say the Greek banks have 10% in capital.

With 43% of their loans non-performing, that means the banks can’t repay 33% of their deposits!

On what planet is that “fixed?”

Sometime in the next couple of years, the Greek economy will suffer another blow.

They won’t be able to make payroll or pay their pensions without running the printing presses. But they can’t do that because they are part of the euro.

Something will have to give.

Either they will get yet another bailout, or they will “bail out” themselves, by leaving the euro zone.

Either way, the chaos will cause disruption across the euro zone, and it’s something we should avoid when possible.

Any investments you hold in euros could be at risk of devaluation as the common currency falls.

And if it’s not Greece that blows up, maybe it will be Italy, where non-performing loans make up 11% of bank assets, or Portugal, where the number is 16%.

Clearly the Europeans have not fixed the debt issues. Don’t let their next crisis drag down your portfolio.

Stay ahead of the trends instead.