A Greek Default is Bad – But a Greek Bailout Much Worse
Many investors continue to favor a Greek bailout to prevent the Eurozone's first sovereign default – but they are rooting for the wrong solution.
Greece has requested another loan from its European neighbors to cover next year's $43 billion (30 billion euros) shortfall as yields on 10-year Greek bonds have climbed over 16%.
The second Greek bailout would come about a year after the European Union (EU) and International Monetary Fund (IMF) loaned the struggling country $158 billion (110 billion euros) to meet soaring financial obligations. Greece took the money on the terms that it would implement austerity measures and cut its massive budget deficit, but the country failed to meet the agreed-upon targets.
EU and IMF officials have been reviewing Greece's cost-cutting actions to determine if the country – now with about $430 billion (299 billion euros) in debt – deserves another huge loan. EU leaders have also considered asking investors to reinvest in new Greek debt when existing bonds mature, buying time to stabilize Greece's sinking economy.
Why a Greek Default Could be Worse Than the Lehman Collapse
The 2008 collapse of Lehman Bros Holdings Inc. (PINK: LEHMQ) ignited a financial meltdown that resulted in widespread bank failures and caused the Dow Jones Industrial Average to lose 18% of its value in just one week.
Yet a Greek default – which (even with a bailout) becomes increasingly likely with each passing day – would actually be much, much worse in many respects.
Sure, it's possible that European Union (EU) taxpayers will soon be dragooned into yet another rescue plan. But that would only delay the inevitable – a catastrophic collapse that will drudge up feelings of panic we haven't witnessed since the global financial crisis hit its apex nearly three years ago.
Dodgy Debt and a Dozing Economy
Greece's debt, at about $430 billion, is less than that of Lehman Brothers, which owed around $600 billion at the time of its bankruptcy. But Greece's finances are much less sound.
Whereas Lehman Brothers participated in the 2003-07 financial bubble with considerable enthusiasm, accumulating vast amounts of the dodgy subprime mortgage paper whose value collapsed in the 2007-08 downturn, Greece's misdeeds date back much further – to its 1981 entry into the EU.
As the poorest member of that group, Greece became eligible for a vast array of inventive subsidies, primarily related to agriculture. However, the frauds the country perpetrated to justify even larger subsidies were even more inventive. And this allowed Greece to bring its living standards close to the EU average, while still being subsidized as if it was a genuinely poor country.
Indeed, Greece produced nothing close to the level of economic output that would be needed to justify its spending and the lifestyle of its people.
The problem for Greece is thus stark: Its people need to suffer a decline in living standards of about 30% to 40%, so that the country's output is sufficient to repay its debts.
How to Turn a Tidal Wave of Profit From the Global Shipping Industry
The shipping industry plays an indispensable role in connecting consumers with their most cherished goods. But many investors unfamiliar with its inner-workings underestimate its potential as a massive profit generator.
Meanwhile, investors who are aware of its importance, and can track the volatile ups and downs of the companies that provide shipping services, frequently score big gains from its oft-repeating profit opportunities.
To get a quick idea of the enormity of worldwide shipping activity, you need only look at the U.S. trade numbers.
European Banks Wait in Fear Over Consequences of Unresolved Greek Debt Crisis
Fresh signs of a possible default in Greece have revived a contentious debate between politicians and major banks in the European Union over what to do about the Greek debt crisis.
Yesterday (Wednesday) Greek Prime Minister George Papandreou had no success convincing opposition party leaders to support new austerity measures needed to comply with bailout terms set by the International Monetary Fund (IMF) and other European Union countries.
Without those measures, Greece will not receive the bailout money it needs to avert default. Default would destroy the country's credit for a decade, maybe longer.
Don't Fret Over Europe's Debt Crisis – Oil Prices Will Bounce Back
The volatility in the oil market has notched up this week, courtesy of another bout with debt jitters in Europe. Oil and gasoline futures are moving down – and most of the energy sector along with them.
In a situation like the current European debt mess – where maximum uncertainty is channeled into a very focused concern – oil futures will generally overcompensate, exaggerating the downside.
Of course, that is of little consolation to the traders who in the past few days have seen about $3.00 cut from the near-month futures (July).
The Japanese Economy: How Its Post-Earthquake Weakness and Scuffles With China Contribute to a Global-Market Reversal
In our ongoing search for possible "inflection-point" catalysts – financial stimulants that could help turn global markets upside down – the Japanese economy has to be a prime candidate.
In the last part of the 1980s, Japan was the world power – so much so that investors on the U.S. trading floors of New York each day watched the Tokyo markets with a mixture of awe and fear. An oft-cited investing aphorism of the day explained this very clearly by holding that "when Tokyo sneezes, Wall Street catches a cold."
Not long after, the Japanese miracle ended, the stock-and-real-estate markets crashed, and that Asian country fell into a funk known as the "Lost Decade" – a misnomer, since the economic malaise that's lasted virtually ever since is actually more than 20 years long.
Why Inflation in China Could Lead to Another Global Recession
Inflation in China is far more intractable than official headline statistics reveal.
That's potentially bad news for global growth and toppy stock and commodities markets.
If China effectively dampens dangerously high inflationary expectations and real, rapidly rising food, property and fixed-investment assets by hitting the brakes too hard, global growth could skid and potentially stall out.
The resulting sound of breaking glass would likely be clear support levels enjoyed by rising stock and commodity markets as they finally correct, along with theories of China's infinite growth trajectory.
LNG Imports: We Predicted How Japan Would Ease its Energy Crisis
Just days after Money Morning columnist Peter Krauth predicted a global uptick in liquefied natural gas (LNG) demand because of the nuclear-powerplant disaster in Japan, experts predicted the Asian heavyweight would boost LNG imports by 50% to help ease the massive energy shortage the country now faces because of the tragedy.
Krauth is Money Morning's resident natural resources expert, and he also runs the "Global Resource Alert" advisory service. Late last month, in the special report "A Trillion Reasons to Bet Big on LNG," Krauth told Money Morning subscribers to take a close look at liquefied natural gas, predicting that Japan would seize upon LNG as a ready and plentiful partial solution to its increasingly serious energy-shortfall quagmire.
Japan relies on fuel imports for most of its energy needs. After the March 11 earthquake and subsequent powerplant accident ruined 20% of its nuclear power output, Japan has been forced to seek out other sources of electricity.
The Future of the Euro: Why Europe's Key Currency is Doomed
The Eurozone project has seen better days, which is why the future of the euro isn't a bright one.
In fact, as all the latest speculation about Greece either abandoning the euro currency – or being booted out of the Eurozone outright – is demonstrating, "the market" is about to apply a level of pressure well beyond what the Eurozone and European Union (EU) were designed to handle.
The number of sovereign states in the EU that are facing difficulty selling new debt, or even a rollover of current debt, is growing.
The Eurozone and the EU are both in trouble. Clearly, the structure that exists today is flawed and will not withstand the rigors and pressures that are headed directly its way.
The ability to kick the can down the road is about to end, and with it some hard decisions will need to be made by the political and wealthy elite.
Let's take a closer look.
How Long Before Greece Leaves the Euro Zone?
I find it ironic that a country which defrauded its way into the Euro Zone is likely to be the first country to exit the Euro Zone. Despite a raft of hasty denials by just about everyone in Brussels, it now seems all but inevitable that Greece will bail on the Euro when they default on the €110 billion bailout they received just one year ago.
Of course, this all started on Friday when an article came out in Der Spiegel claiming that Greece was mulling an exit from the Euro due to near-daily violent protests and the apparent failure of austerity measures. An emergency meeting of European finance ministers was convened in Luxembourg in response to the report, which they all denied. Methinks they doth protest too much.