Four Moves to Make Before Greece Defaults

The very austerity measures that Greece implemented to remedy its sovereign debt crisis have crippled its economy so badly the country is actually sinking deeper into the red, making default all but inevitable.

Already suffering from a four-year-old recession, the Greek economy has been dragged down further by the series of austerity measures - tax increases combined with cuts in pensions and wages. As a result, the Greek economy is expected to contract 5.5% this year and 2.5% in 2012.

The Greek government announced this week that unemployment soared to 16.5% in July, up from 12% a year earlier. It's expected to rise to 17.5% before the end of this year.

With its gross domestic product (GDP) shrinking, Greece has less money to repay its debts, and worse, it must continue borrowing at higher interest rates.

Greece's debt-to-GDP ratio is expected to rise to 162% this year and 181% in 2012.

"Without drastic action, [Greece's] debt-to-GDP ratio will rise to even more alarming levels," a Milken Institute report on the Greek debt crisis said earlier this month. "The ratio is reaching levels at which it becomes extremely difficult, if not impossible, for a country to avoid default on its debt."

Even the "troika" of Greek lenders - the European Commission (EC), the International Monetary Fund (IMF) and the European Central Bank (ECB) - concluded in a report released yesterday (Thursday) that the troubled country's "debt dynamics remain extremely worrying."

"When compared with the outlook of a few months ago, the debt sustainability has effectively deteriorated given the delays in the recovery, in fiscal consolidation and in the privatization plan," the report said.

The report also expressed concern that Greece's budget deficit for 2011 will fall between 8.5% and 9% of GDP, which exceeds the target of 7.75% of GDP set by the troika as a condition for granting the most recent batch of bailout loans.

What's Next

To continue to meet the troika's criteria for still more bailout loans - which Greece must have to avoid default - even more austerity measures will be needed.

But the Greek public, as well as many politicians, has displayed more resistance with each new set of austerity measures.

Protests, strikes and riots have accompanied each new collection of austerity measures, growing larger and more severe each time. This week, a 48-hour strike has virtually shut the country down, and demonstrations in Athens turned violent.

Although the ruling Socialist Party is expected to have the votes to pass the latest austerity package this week, Greek lawmakers are tired of squeezing their citizens and are near the end of their rope.

Greek ruling party lawmaker Vasso Papandreou, who had threatened to vote against a piece of the law that suspends the power of unions, said yesterday she would support all of the measures "but this is the last time."

Another Lehman Meltdown

With the Greek debt crisis spiraling towards default, investors need to know how it could affect the markets in the United States - and what they can do to shield themselves from the disaster.

According toMoney MorningCapital Wave Strategist Shah Gilani, "U.S. banks are widely believed to have $41 billion of direct exposure to Greece" and have loaned heavily to their European counterparts.

More sobering, Gilani says, is that "U.S. money-market funds have a hefty European exposure, too." He noted that 12% of the loans made by our biggest money-market funds were made to three big European banks - two of which, Societe Generale SA (PINK ADR: SCGLY) and Credit Agricole SA, were downgraded by Moody's Corp. (NYSE: MCO) just last month.

The third, BNP Paribas SA, was downgraded by Standard & Poor's last week.

Meanwhile, Money Morning Chief Investment Strategist Keith Fitz-Gerald is gravely concerned about the how such downgrades will affect financial institutions deeply entrenched in the $600 trillion derivatives market.

Just four banks hold 95.9% of the derivatives in America, Fitz-Gerald said: JPMorgan Chase & Co. (NYSE:JPM), Citigroup Inc. (NYSE: C), Bank of America Corp. (NYSE: BAC) and Goldman Sachs Group Inc. (NYSE: GS).

"The firms trading in derivatives will have to come up with huge amounts of cash they don't have," Fitz-Gerald said. "So they will sell everything but the kitchen sink as a means of raising it."

A similar situation surrounding the demise of Lehman Bros. triggered the market collapse in 2008-2009.

Protect Yourself

Fitz-Gerald advises that investors do the following to guard their portfolios against the fallout from the Greek debt crisis:

1. Sell into strength using trailing stops.That way you can capture the rally if it resumes and move your money to the sidelines if it doesn't. Nobody knows how long the fairy tale will last so you might as well let the markets show you the way instead of trying to second guess them and risk being wrong.
2. Buy commodities.Holding energy and agricultural commodities as well as precious metals like gold and silver will help you preserve your wealth. Even after large pullbacks that may result from capital raising activities, the long-term direction for these is up. To minimize risks, buy in chunks or dollar cost average in over several months.
3. Go Global.Put new money to work in "glocal" stocks. These are companies with fortress-like balance sheets, globally diversified revenue and experienced management. Average in here, too. Things may get rocky over time, but dividends are the best defensive measure available.
4. Short financials.If you're an aggressive trader, you can short individual banks or the entire financial sector. After all, "they" took us for a ride -- why not get even when the tables eventually turn?

News and Related Story Links:

• Money Morning:
  Don't Buy Into Europe's Latest Rescue Effort - The Continent's Banks Are About to Go Bust
• Money Morning:
  IMF Growth Forecast: U.S. and Europe Will Ignore Warnings, Despite Slashed Estimates
• Money Morning:
  As Greek Debt Default Nears, Investors Need to Take Cover
• Money Morning:
  The Only Way to Solve the European Sovereign Debt Crisis
• Money Morning:
  European Union Debt Crisis Stings France, Putting U.S. Banks at Risk
• Money Morning:
  Special Report: What is the Greek Debt Crisis, and What Does it Mean for Investors?
• Reuters:
  Greek unemployment rises to 16.5 percent in July
• Wikipedia:
  Economy of Greece
• The Financial Times:
  Troika warns time running out for Greece
• Bloomberg:
  Greeks Told to Forget 'Miracles' as Aid Depends on Austerity
• Associated Press:
  Greek 2nd rescue deal seen not enough
• Milken Institute:
  Greece's "Unpleasant Arithmetic": Containing the Threat to the Global Economy

David Zeiler

About the Author

Browse David's articles |

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

… Read full bio