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Big Trouble Ahead for Greece

Written by Briton Ryle
Posted April 22, 2015

It sounds like something out of a history book: a heavily indebted ruler faced with the possibility that he might not meet a debt payment to a group of international bankers decides to steal as much money as he can from his country's coffers...

Two days ago, this exact scenario played out in Greece.

Newly elected Greek president Alexis Tsipras issued a legislative order that all public funds not immediately needed for payment must be transferred and deposited at the Bank of Greece. 

Of course, it's not Tsipras' personal debt. The Greece government owes the International Monetary Fund a lot of money — over $200 billion.

It just made a $480 million payment to the IMF. On May 12, it has a payment due of a little less than $1 billion. And by the end of April, the Greek government has to shell out $2.2 billion in wages and pension payments.

Then on July 20, more than $3 billion is owed to the EU Central Bank.

Greece simply doesn't have the money — at least, the Greek government doesn't have the cash. Apparently, if you include (steal?) the cash parked with cities and states, Greece can make it through another month as a member of the EU.

But after that, who knows?

We really could be just a few weeks away from Greece leaving the European Union.

998 Points

We've seen this drama (Greek tragedy?) before. The Greek debt crisis reared its ugly head in 2010 and again in 2012.

The first go-round in 2010 was particularly bad. We saw a 2% decline on the Dow Industrials on April 27, 2010. At today's levels, 2% would be 358 points.

Then on May 6, the Greek debt saga helped set the stage for the infamous "flash crash" when the Dow was down nearly 10% — 998 points — at one point during the day. From today's levels on the Dow, that would be an incredible 1,790 points.

The Greek debt story has been rife with lies, profiteering, profligate government spending, coercion, and now what amounts to outright theft. But then, that's what governments do, isn't it?

Greek bondholders have already been shafted once. They took a 50% haircut in 2011. Then after the second bailout, Greece actually managed to sell $3 billion worth of bonds. Those bonds currently trade around 60 cents on the dollar.

I'm not sure what those buyers thought would happen, but they will likely get shafted again.

Lies and Goldman Sachs

Let's not forget, too, that we probably wouldn't even be having this discussion of it weren't for Goldman Sachs. After all, it was Goldman Sachs that helped Greece lie about its debt-to-GDP ratios so Greece could get into the EU in the first place.

Using some secret derivatives known as swaps, Goldman helped Greece turn a ~$3.5 billion debt into an asset. Bloomberg reports that the day in 2001 that deal was struck, Greece immediately owed Goldman $793 million. That was 12% of Goldman's 2001 revenue.

The swap was renegotiated a couple times. And each time, the terms favored Goldman more. By the time the swap ran out, Greece's Goldman debt matched the amount of debt it was trying hide — around $3.5 billion.

It should also come as no surprise that the head of the division that "helped" Greece was none other than current Goldman Sachs CEO Lloyd Blankfein.

This particular part of the story is rife with lies, price gouging, and predatory lending. But then, that's what Wall Street investment banks do...

There But for the Grace of the Fed

The Greek people have been royally screwed over by their government and Wall Street. It didn't have to be this way.

Greece had the fastest-growing economy in Europe between 2000 and 2007. Annual GDP growth was 4.2%. Output went up 40%.

Unfortunately, government spending went up 80%. In fact, Greece has run a budget deficit since 1973. Between 1981 and 2013, budget deficits were above 3% of GDP every year.

Greece's debt is currently 160% of GDP. And if it hadn't been able to refinance its debt and shaft bondholders, that debt-to-GDP ratio would be over 200%.

There's just no way this money can get paid back.

And it's mainly because Greece is in a monetary union called the EU. Greece uses the euro, a shared currency. It has no control over the euro itself. It has no printing press like the U.S.; t cannot devalue its currency by printing more in order to pay off debt.

Greece has suffered three distinct recessions in the last six years. Unemployment is over 20%. Youth unemployment is close to 50%. Around 80,000 businesses went bankrupt in 2010.

The Greek economy grew in 2014, reversing that six-year period where it lost 25% of GDP. But that ended when Alexis Tsipras was elected president in January. He pledged to end austerity and return Greece to its glory days.

That was not what the world — and some Greeks — wanted to hear. The IMF and EU immediately postponed further bailout payments, Greeks pulled $19 billion out of banks, and now the government is nearly out of money.

What's Next?

It just never ends well when governments operate on lies and theft.

I don't know what will happen next for Greece. I suspect some of the volatility we've experienced so far this year in the stock market is related to the escalating odds that Greece leaves the EU.

We won't have to wait long. The potential for default is right around the corner. And getting the heave-ho from the EU would follow that pretty quickly.

Keep an eye on U.S. stocks. If Greece defaults, it will almost certainly start a big sell-off that may not end until the question of EU membership is resolved.

Until next time,

Until next time,

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Briton Ryle

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A 21-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He is also the managing editor of the Wealth Daily e-letter. To learn more about Briton, click here.

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