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As Scary as it Seems, Greek Debt Crisis Won't Spawn Second Global Meltdown

The Greek debt crisis is starting to display an uncanny resemblance to the subprime crisis that sank the U.S. housing market, sent the global economy into a tailspin and touched off the worst financial crisis since the Great Depression.

Indeed, Greece has behaved very much like a subprime country:

  • It has borrowed more money than it can possibly repay – all the while lying to everybody about its true state of affairs.
  • "Liar loans" have been made, in Greece's case, to enable the country to "cook the books" with regard to its budget deficits.
  • New problems continue to emerge – apart from the liar loans – making it impossible to be sure all the troubles have been unveiled.
  • And as was the case with the subprime-mortgage crisis, embattled Wall Street investment-banking-giant Goldman Sachs Group Inc. (NYSE: GS) appears to have been intimately involved in the business.

And the similarities don't end there.

Why Bailouts Can Bite Back

Bailouts of a single-such miscreant are possible, but nobody wants to undertake them because of the distaste created by the miscreant's past and present activities.

Just as Lehman Brothers Holdings Inc. (OTC: LEHMQ) executives kept voting themselves giant bonuses as the company was tottering into bankruptcy, so, too, do Greek-public-sector workers go on strike after strike to protect their right to retire with a full pension more than a decade earlier than ordinary German workers.

As with the subprime miscreants, the temptation is strong to let the borrower go to the wall … except for one thing – the deep-seated fears that the miscreant's demise will touch off a "domino effect" among other weak borrowers, several of which may be endangered if Greece is allowed to fail.

But a bailout attempt may not be the answer, either. Horrifyingly, because of the exposure that French and German banks have to Greece and the rest of southern Europe, there is a very real prospect of the entire global banking system collapsing – with incalculable danger to the world economy – if things are done wrong.

The main factor that separates the Greek debt crisis from the U.S. subprime-mortgage crisis is that the danger of a "contagion" spreading if Greece goes bankrupt appears to be less.

Portugal – generally viewed as the next-most-obvious defaulter after Greece – has a considerably lower debt load (at 90% of gross domestic product, or GDP) and a considerably narrower deficit (at 9% of GDP). In fact, Portugal's deficit is actually less than the budget shortfalls of Great Britain and the United States. More important, Portugal's affairs have been run with a probity and conservatism lacking in Greece – the latter having viewed the European Union that it joined in 1981 as an ideal funder for its idle and corrupt socialist fantasies.

The poorer countries of Eastern Europe – most notably Romania and Bulgaria, which both joined the EU in 2007 – have made certain (by virtually every measure imaginable) that Greece will no longer be ranked as the EU's poorest member.

Unfortunately, the mere addition of less-affluent countries doesn't mean that Greece is any better run. Indeed – except for moments of extreme post-communist fantasy in Romania, Bulgaria and Hungary – nowhere else in Europe is anything as badly run as it is in the Hellenic Republic. Certainly Italy isn't: That southern European country had too much debt going into the crisis, but is currently well managed. It carefully avoided foolish "stimulus" during the recession and – as a result – has a budget deficit that The Economist expects to reach a mere 5.3% of GDP in 2010.

The calculus is thus different from that of the subprime crisis.

U.S. Subprime Crisis – Part II?

Whereas the fall of Lehman Brothers caused a justified concern that the whole of Wall Street was in the same predicament, a Greek default would cause "contagion" only in the minds of fevered hedge-fund speculators, without any solid basis in reality. There would be no need for the euro to break up (whether or not Greece abandoned its attempt to remain a member) and no particular strain on the EU as a whole.

That suggests that the German attitude – an opposition to a Greek bailout – is probably the economically better approach.

Indeed, the German government has perceived quite correctly the problem with a Greek rescue. Whereas, with the U.S financial crisis, there was no danger that the Wall Street bailout would produce subsequent outbreaks of subprime-mortgage lending (though the determination by the U.S. Federal Housing Administration to keep lending in the downturn appears to have done so, at great-and-increasing expense to U.S. taxpayers), the "moral-hazard" danger of a Greek bailout is immense. All over southern and Eastern Europe, there are substantial minorities of the population for which the possibility of a bailout by German taxpayers is an invitation to total government-spending profligacy.

For an illustration of this problem, take a look at Hungary from 2002 to 2008. The Socialist government of Ferenc Gyurcsányran mad for six years, under the theory that EU membership – achieved in 2004 – meant they would never have to pay for their crazed spending.  However, Hungary is by no means the most profligate of the Eastern European members of the EU – Romania and Bulgaria are certainly worse. Moreover, Italy and Spain both have huge minorities, often in control of those countries' governments, which if bailouts were acceptable would find the temptation to expand government spending at Germany's expense pretty well irresistible. A Greek bailout could thus lead to bad fiscal behavior among so large a proportion of the EU that future rescues would become systemically impossible.

This is the paradox of the Greek-debt situation: It seems to be understood by German Chancellor Angela Merkel, but by almost nobody else involved.

The Road Ahead

A Greek default offers few dangers – Portuguese or Italian debt would become huge "Buys" at the prices they would reach in that case, but the EU and the European euro would be unaffected, or even strengthened. However, a Greek rescue would bring huge long-term perils – and given the spending propensities of the less-responsible elements of the European left, "long-term" means no more than four to five years away.

With apologies to Lord Nathan Rothschild, the message for outside investors in European stocks and bonds is quite clear: Buy on a Greek default, sell on a rescue.

[Editor's Note: Lord Nathan Rothschild once counseled investors to, in effect, "Buy on the cannons [and] sell on the trumpets" … (Achetez aux canons, vendez aux clarions).

Leave it to Money Morning's Martin Hutchinson to apply that old French investing proverb to a new Wall Street financial problem – and to do so in a way that will handsomely reward those who follow his lead.

Regular Money Morning readers won't be surprised: That's the kind of creative, but profit-focused thinking that's enabled Hutchinson to succeed again and again where other experts have failed – one right after the other. And Hutchinson has pulled off this string of successes in the face of the worst financial crisis since the Great Depression – a financial crisis that, not surprisingly, Hutchinson is widely credited for having predicted and warned about well ahead of time.

For those who aren't regular readers, and who might like an additional illustration of Hutchinson's abilities, consider dividends, the icon of the super-conservative investing set, and gold, the safe-haven nest of perpetual inflation hawks.

With his "Alpha Bulldog" investing strategy – the crux of his Permanent Wealth Investor advisory service – Hutchinson has managed to combine dividends, gold and growth in a winning formula that has developed eye-popping returns for subscribers. To find out more about opportunities related to dividends, gold, "Alpha-Bulldog" stocks and The Permanent Wealth Investor, please click here.]

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  1. David | April 28, 2010

    When will the liberal, socialist leaders of America realize that we cannot borrow and spend our way out of this depression? Or, are they intentionally prolonging the depression in order to take full advantage of this "opportunity" to change our country completely away from its original purposes? These people appear to hate our constitution and want America to mirror the socialism of Europe!

    Go ahead and blame the big financial institutions, but the real problem is our runaway government which practically forced these instututions to give mortgages to people who couldn't possibly pay it back. The government run Freddie Mac and Fannie Mae are basically bankrupt because of the idiots in charge – Barney Frank, Chris Dodd and the like. And, Obama? This guy is either smarter than all of us and has already played this all out in his head to takeover as a tyranical dictator or he is so racist that he has allowed his racism to make him blind to the fact that he is destroying our nation with his lunacy!!!!!!

    • Ben | April 28, 2010

      Right David! But you forgot the black helicopters and the one world government.

    • WhatAboutBob | April 29, 2010

      Ditto on that remark! o'Bama thinks his mouse trap is better! It's the progressives of the past 85 years that has taken America down this path of destruction! o'bama is going to spend us back to prosperity with our future money! Please! Does anyone in Washington D.C. have any common sense, forget all the Ph D's, look what that has got us! A Godless society full of greed,liars,murderers and thieves! Not necessarily in that order!

    • Allison Roberts | April 29, 2010

      Play fair please. The deficit was run up way before Obama by none other than Republican George Bush. Only 8 voted against the 1999 deregulation of the banks, so be careful when blaming one side or the other. I'm sure a lot of money from the banking institutions greased the campaigns of those who voted in favor of deregulation which now I think allowed greed and irrational lending to proliferate.
      And to bring socialism into this argument is unrelated to the financial mess we find ourselves in now. Someone has to try to fix this mess. What would you suggest Obama do?

    • Mike | May 1, 2010

      David, you also seem to have conveniently forgotten who initiated the bailouts, after taking our country from a budget surplus to the greatest deficit in American history in a mere eight years. None other the real leader of the prior regime, the war profiting Cheney, who pocketed most of the deficit dollars and his stooge, good 'ol boy George W.

      To all Republicans as well as Democrate, please stop this infantile – black and white, our perspective is right and yours is wrong – behavior and at least pretend to be intelligent adults. Do, and support what is right for the betterment of our country before we rip it apart at its very core. I for one am sick of this bickering, it is only prolonging our suffering.

  2. Ray | April 28, 2010

    Remember—This article by Mr. Hutchinson is only one man's opinion and we have all heard many opposing opinions.

  3. peter c neumann | April 28, 2010

    David, you're just p.o.'d because there's a black guy in the White House. Face it, you are essentially a racist although you probably will never admit that to yourself. Obama didn't create this mess. He inherited it! (From the Bush Administration). If you think you can do better, why not run for office yourself? Of course, it is easier just to moan, groan, and whine about the black guy in the White House!

  4. REGGIE B. QADAR | April 28, 2010


  5. elwind45 | April 29, 2010

    If I had a dime for everytime I heard sub-prime will be contained. I would be wealthy. To believe that bond traders wont punish countries over their fiscal party is second grade logic. The longer the blood is in the water…. Yeah kleptocrate Bush and his croonies should already be in chains and not writing books. The idea that a few homeowners with bad loans caused everything is less than kindergarten logic. The mortgage bonds tanked long before any homeowner gave up on their purchase. Fraud explains sub-prime! The big guys did not care about loan quality because bond investors would buy anything AAA. Finally, The Germans are using Greece as a proxy to devalue the Euro to better compete with the RMB. I do believe the marginal homeowner after hearing it was his fault month after month, has no problem walking away from his nightmare!

  6. elwind45 | April 29, 2010

    I just dont understand how Obama catches any blame for sub-prime. Its like the owners burned their fields and after the fact plant a scarecrow to point to and blame. To think the "America love it or leave it crowd" has turned on its country is sad. I picture these people standing over a hole in a fallen tree. A tree which for 50 years produced pure honey non-stop. Now the honey pot is gone. The bee's got tried and re-located! Leaving the unhappy citizen crying, kicking dirt over it. Its like the new deal never happened. Unhappy,

  7. Costas Louropoulos | April 29, 2010

    Dear Martin,

    The otherwise "thorough" analysis of why Greece's crisis won’t spread around, is missing one very important element: The defense budget of Greece.

    Yes, we admit that we Greeks are notorious for mismanaging our affairs and most importantly, opening our house doors and letting other peoples know that we are doing wrong. This is a historic truth. However, there is one more historic undoubted fact: in the 3000 years of written history, we have been defending the West against the East. So it happened in the Marathon battle when we stopped the Persians, so happens today with the thousands of illegal immigrants every day arriving in our 15000 klm shorelines of Greek islands and the mainland Greece.
    Refugees from Iran, Pakistan and Afghanistan pass daily from Turkey and land in Greece. Let CNN cameras come over, look at any street of Athens to see those cleaning windscreens of cars in the traffic lights. Not to mention the historic dispute with Turkey, which is not all up to the two nations to resolve. Isn't it the Germans and French who supply both Nations with submarines and war airplanes for Greeks and Turks to frighten each other over the Aegean Sea? Not to mention 1,5 million illegal immigrants in the country from Albania, Bulgaria, Moldova, Romania, Poland, Armenia, Georgia, Egypt, Palestine, Somalia and a myriad of other countries in the region , flooding the streets of our towns and the fields of our provinces.
    In the last two decades since Greece joined the EU, the warranty of Greek borders is a constant issue between Greece and the rest of our partners. They defy. Angela Merkel is the latest most defiant of them all. Not to mention our recent orders of submarines from German shipyards, which submarines bend erroneously in one side!
    The rest of Europeans know very well what we are talking about since they are the largest defense supplier of Greece military "mighty" armed forces nowadays, since we shifted our monopoly from the US.
    When you compare deficits of Greece and Portugal, please take into account the defense budgets. I suppose you would have a completely different picture.
    Personally, I would love my country to be neighboring with Luxemburg and have only a few thousand picturesque mounted police as military troops to cater our security affairs.

    Thank you and Regards

  8. Ben | April 29, 2010

    So, it is now okay to call the American president a racist on the Money Morning website!
    Good to know where your politics are.
    You don't even allow your readers to mock the genius who does it.

  9. noel | May 1, 2010

    Buyshares etc, on a Greek default,sell on a Greek rescue. Good advice…

    But… buy or sell shares,etc, on a Euro devaluation??

    Any opinions?

  10. filias fogg | May 3, 2010

    No doubt that the correct rsponse for Greece´s inability to run it´s finances with probity along with the less than transparent accounts of is to come down hard on these practices. However, the systematic attack on the euro is no less engineered to give us the another financial crisis to be faced.

    The euro has/had become the defacto challenger to the USA dollar, which undermines the concept that the US dollar should be the only currency that OIL should be continued to be sold in. Iraq was invaded because US sanctions forced Iraq to look for other buyers of oil and found a ready source of hard euro denomintaed buyers – it was making money!

    This single fact, meant for the whole war to be trumped up as a warning to any other oil producing country, what would happen to them if they considered selling OIL in any other currency other than the US dollar.

    Of course we can´t foprget the fact that most business worldwide also denomiate world trade mostly with a US dollar value, goes to show how important to accept dollars irrespective of wether you are trading with Amercan companies. This in effect keeps a whole load of dollars off the market with a subsequent effect that the US dollar in general is inherently overvalued.

    So who can afford the dollar tank? The answer is no one and that poses a dilemma of tremendous scale, beacuse of one thing. Thre emergence of the Euro as a true alternative. So much so that Chinese companies had be recently allow for purchases in Euros instead of US dollars.

    The US obvo¡iuosly takes this as the true threat to their monopoly of world econic power.

    Now, the second phase of the plan calls for a systematic undermining of the euro as an stable currency and to strengthen obviously, the idea than the US dollar remains the only stable currency of choice.

    When will the world wake up that everyone (even those that do not hold US dollars!) is still subsidying Americans for their profigate lifestyles because we purchase OIL in dollars, and therefore keep dollar denominated treasuries to pay for them oil, without ever cashing them in – and thus bankrupting America because they can´t pay up or print anymore money if your debt to called in by creditors.

    The sooner the world moves to pricing oil in a basket of currencies, the better off everyone will be, except for Americans, who will need to foot the bill when people don´t need to hold on to dollars to pay for oil and start going to the bank to cash in them dollars.

    What is happening in Europe is only an engineered distraction to what is fundamentally an ongoing fight for monopolisation (and thus the manipulation of it´s price) of the economics of oil. The battleground still is the Euroisation V´s Dollarisation.

    Are we looking at the beginning of the end of one currency or the other? That is the question thats being resolved. The USA understands that very concept of "European Union" is predicated on financial stability (not political), without it, europe returns to 22 bickering neigbours with scant understanding of what they hold in common, which is exactly what America prefers.

    death of eruo = death of european union power = american dream/con continuing forever

  11. blue monkey | May 7, 2010

    Greece and Spain won't pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

  12. blue monkey | May 7, 2010

    Greece and Spain won't pay back. The only thing Germans can do is:
    REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
    U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
    Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.

  13. Dr. N.P. Sinha | May 14, 2010

    Unproductive, maintenance expenses far beyond income year after year financed by deficit budget can lead any country no where than where Greece is today. The beneficiaries who benefited, pensioners, bureacrats, public sector workers must repay now to bail out their country from the brink of financial collapse. Drastic cuts must be done in public expenditure including salary level. The trillion dollar bail out package will not work unless conspicuous expenses are curtailed. A trillion dollar loan to repay old loans will not propel productive activities. What is needed for Greece restructuring is not additional loans to repay old ones but writing of loans and recall of war equipments sold to it that are lying unused.

  14. You've spent too much time listening to Fox News. | July 15, 2010

    Look. It was the actions of the previously right wing USA that caused this whole mess. The fact that we (British and the whole of Europe) trusted them with leading a sensible banking industry instead of conducting irresponsible super-capitalist risk taking is the cause. Stop looking at Europe and going 'Aah, those Europians have no idea what to do with an economy'. The fact is the right wing has simply found another way to destroy our countries. No longer with Blitzkriegs and historic massacres but rather through irrational idiocy.

    I guess we don't have to worry anymore though seeming as China and India are about to knock them off their high horses. Look at where the money is now. Looks like you arn't the cleverest after all. Unlucky.

  15. Michelle Davis | March 15, 2011

    It is unlikely that the Greek crisis would become a global economic depression but this development will definitely affect the rest of the continent. This can be trouble for the U.S because it will directly hit the Americans in one major area: exports.

    The U.S government is planing to double the exports over the next five years. President Obama himself pointed out that the net exports need to rise within a reasonable span of time. If things get worse in Europe then the dollar would be in a stronger position than the euro. In that case, American exports would become costly and consequently, the exports to Europe will drop.

  16. Michelle Daivis | March 16, 2011

    It is unlikely that the Greek crisis would become a global economic depression but this development will definitely affect the rest of the continent. This can be trouble for the U.S because it will directly hit the Americans in one major area: exports.

    The U.S government is planing to double the exports over the next five years. President Obama himself pointed out that the net exports need to rise within a reasonable span of time. If things get worse in Europe then the dollar would be in a stronger position than the euro. In that case, American exports would become costly and consequently, the exports to Europe will drop.

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