A primer on the Greek situation

by Wayne Ferbert on May 15th, 2012

If you are a self-directed investor and you follow the markets, you are probably confused by all of the news you hear about the economy in Greece. There is a lot of energy on the business talk television, radio, and blogosphere that is focused on the problems in Greece. You are probably asking yourself: how did they get themselves in to this mess?

The WashingtonPost.com ran this great FAQ on the Greek situation yesterday written by Brad Plumer. It does a great job at explaining how Greece has gotten itself all the way to the brink – and how they seem unwilling to come back from the brink. In this case, the brink would be an exit from the Euro for Greece.

The article does not address what a Greece exit from the Euro would mean for the rest of Europe or for the US. There are some links in the article to other articles that speculate on what a Greece exit from the Euro would look like. The article does touch on what a Euro exit means for Greece however. Check out the article – it is worth reading.

Here are a few excerpts that I found most interesting:

Recall Greece’s basic problem: The country racked up many billions of dollars of debt that it can’t repay without help, and the Greek government doesn’t have enough cash to cover all of its own obligations.

Here’s the dilemma: These austerity measures are spectacularly unpopular, and Greek voters keep punishing any party that tries to implement them.

If those cuts don’t happen (by the Summer deadline), Greece won’t get its bailout money. It will then default on its debts, and the country would likely have to leave the euro.

(Elias Papaioannou) says that much of the TV chatter in Greece gives off the impression that it’s possible to stay in the euro and oppose the bailout.

I think this last point is why Greece is on the brink. The populace in Greece keeps rejecting austerity and austerity is needed for the bailout to continue. So, the voters are likely to cause Greece to leave the Euro - even though most object to that end game. Leaving the Euro is the great unknown for the markets.

I must admit that I think Greece leaving the Euro can be managed. But Italy and Spain are another matter entirely. I would focus more on those countries than Greece. To me, Greece is the Bear Stearns – it can be allowed to fail and it will be painful but we will all get thru it. Italy and Spain would be a different matter altogether.

Either way, I am glad to be hedged.

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