Why You Should Care About the Greek Debt Default

by Jason Jenkins, Investment U Research
Thursday, July 14, 2011

Yesterday, I laid out a few reasons why the United States and Greek debt situations are different.

So if the Grecian debacle isn’t some foreboding prediction of what America will become if we don’t handle our deficit crisis, why should you care if you have no exposure to Greek assets?

To answer that question effectively, you have to actually know if you do have some exposure to the country. In order to be more specific, search for any exposure in your portfolio in regards to the European Union or American banks that trade heavily with European banks (especially multi-national French and German institutions).

There is a significant Greek influence in international portfolios since it joined the Union in the early 2000s. In the mid-2000s, any country within the EU protective umbrella received a pass. Analysts overlooked the valuation of the individual country and based actions on the perceived strength of the Union as a whole. When the economy tanked, the world took notice that Greece used some peculiar accounting practices to make a frog look like a prince…

How the Greek Debt Default Will Affect Investors

Let’s look at possible scenarios of how the European Union will handle this mess and how it will affect us.

• First, if the EU likes the austerity measures that the Greek government passes and decides to bail them out, the EU as a whole has less euros to spend on American goods. The United States is very dependent on exports due to the current weakness of the American consumer. What we must look at is who bares the biggest burden of a bailout. If, as presumed, it’s the French and the Germans, this could the hurt trade of U.S. banks due to the volume we have with each country’s banking institutions.

• Second, if Greece defaults, we could see a double whammy. All investors would have to readjust their books and make up lost income of interest payments. What could be even worse is if a Greek default becomes that first domino which leads to other troubled EU countries falling (i.e. Spain, Portugal, Italy and Ireland). This would be a dramatic blow to Wall Street.

With the Greek government recently passing a new wave of austerity measures to keep creditors happy, it looks like the country will get bailed out… again. This will be the second bailout in as many years. The markets have stabilized for the short term. However, when the only strategy implemented to save Greece from default is throwing good money after bad, expect the EU to revisit this train wreck soon.

Knowing the Difference Between Economic and Political Investments

Looking long at Greece, keep this in mind: The EU demands member countries to limit budget deficits to 3 percent of GDP and government debt to 60 percent. This seems feasible for its larger members but a burden for its smaller countries. When troubled states receive aid, it’s almost as if it’s really a bailout to the larger European banks who are their main creditors. Once that state can no longer make its interest payments, it will most likely have to privatize many of its public services.

This means that spending on transportation, power and basic infrastructure needs – which is usually handled by a government – are sold to the private sector. The prices for these services will definitely be set high enough to cover interest and other financing charges, high salaries and bonuses. Also, these enterprises will be managed to turn profits.

As Greece continues to fail, keep an eye on the companies looking to buy these services. It’s important to know the rationale for any company’s investment. Greece needs to sell about 50 billion euros worth of public assets by 2015 to satisfy the EU. German companies are interested in a number of Greek assets that will be undervalued. Germany’s Deutsche Telekom has begun to buy large amounts of Hellenic Telecommunications (OTE).

But two other global power players, China Ocean Shipping Co. and Gazprom (PINK: OGZPY), have also expressed interest. The main problem though is that Russian and Chinese companies see privatization more as a means for geopolitical gain in Europe than profitable opportunities. Know the difference between economic and political investment as this story unfolds.

Good investing,

Jason Jenkins

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