Big Trouble in Little Athens, Revisted

It’s been over five years since Greece’s current financial crisis started making public headlines. Since then Greece has received more than 240 billion Euros of bailout loans from the ECB, the IMF, and the EU (aka the “Troika”).  That figure doesn’t include the “phantom” aid that Greece also received in the form of the debt restructuring.  Private creditors were basically forced to accept new terms on their existing Greek government bond holdings — including extended maturities, lowered interest rates, and reduced principal.

Five years and hundreds of billions of Euros later, here we are again.  Greece is on the brink of insolvency and dangerously close to missing a 1.6 billion Euro loan payment due to the IMF at the end of June.  While the Troika is scrambling to prevent Greece from defaulting, the irony is Greece already has.  “Debt-restructuring” and “deferred-payments” may be different ways of saying it — but Greece is technically already in default in more ways than one.

It’s easy to pass judgment, but without being privy to the details, it’s impossible to know what the real source of Greek’s problems is.  One thing that seems certain, however, is the Troika’s decision to solve Greek’s debt problems with even more debt isn’t working.  The ugly truth is Greece can’t afford to repay everyone and will need to stick the losses to someone — pensioners, the Troika, or otherwise.

Given its political clout, the Troika may see a default on its loans as improbable as it is unacceptable, but all creditors are subject to credit risk.  If the Troika takes a haircut on its bailout funds, it ultimately has itself to blame.  The Troika knowingly, or at least should have knowingly, extended credit to a very high-risk borrower.  A potential default should have been a very reasonable and realistic expectation from the start.

Maybe this unacceptable event is exactly the kind of wake up call the Troika needs to prevent similar problems in the future.  Had the Troika not offered one bailout after another, they wouldn’t be in their current position, to begin with, and Greece would have been forced to find a real solution years ago.

Obviously, Greece is to blame as well. It’s shown egregious financial incompetence and complete lack of fiscal stewardship.  Allowing Greece to fail may be a necessary evil.   Such an event may be the catalyst that sets off the next global market rout, but then again that’s bound to happen eventually. Sooner rather than later may mean that Greece, Europe, and the world will finally deal with its can of worms instead of just kicking it down the road.

Victor K. Lai, CFA

This blog is for informational purposes only. Nothing on this blog represents advice. Investing is inherently risky and involves the potential for loss. Victor Lai does not own any of the securities referenced in this posting. Clients of Bellwether Capital Management LLC may own shares of the securities referenced in this posting.