Greece Is the Word

“We would never advise people invest simply because Greece is strong and we would certainly not advise people sell because Greece is weak.”   – SH

By Steven Higgins, Financial Advisor

Have you ever noticed that if you go into a Greek, Syrian, Palestinian, or Israeli restaurant, they serve pretty much the same foods? They all seem to claim it as their own. Dolmas, falafel, and hummus: where does it come from? Regardless, it’s delicious and really good for you. When I think of Greece, I usually think of food, but not these days. For the last five years we’ve heard a lot about Greece and not much of the news has been good. The little Mediterranean island nation has been making waves. Before 2008, Greece had enjoyed fourteen straight years of economic growth and with its membership in the European Union was generally accepted as a developed nation. In 2008, the global recession took a toll on Greece. Now seven years later Greece is in disarray. Unemployment is at 25% and the country has now defaulted on its loan payment to the International Monetary Fund (IMF). I don’t want to write a redundant article on Greece, just Google it, you’ll find more articles than there are Greek residents (of which there are 11 million). I’m going to briefly let you know what I think you need to know and why it matters.

Why is Greece is in so much debt?
Greece is what is called a “welfare state” and that costs a lot of money. When Greece, like other countries, was hit by the 2008 recession they took bailout money from the European Central Bank (ECB) and the IMF under the conditions that they would overhaul their economic system and repay the debt. Since 2009, the reforms called austerity have been very unpopular among Greek people. As a Greek citizen you can retire on a government pension after 35 years of work at 80% of your final salary. So, if you started working at 22 you could retire at 57. It’s pretty simple math, with a shrinking Greek economy, there just isn’t enough money. The Greek people want somebody to pay and that somebody is ECB and IMF.

Why is Europe tired of helping Greece?
Germany has the largest economy in Europe so any bailouts or assistance from the ECB falls on the shoulders of the Germans. With an average retirement age five years older than the the Greek retirement age and the average pension 15% less than Greek pensions, Germans are pretty wary of working to subsidize early retirement for the Greeks. If the ECB, meaning Germany, decides to cut the cord, Greece will run out of money and be forced to abandon the Euro and starting printing its own pre-Euro currency, the Drachma. It is estimated that the Drachma may be worth about 50% of the Euro, so all Greek assets, pensions, etc would be essentially cut in half. Since Greece imports pretty much everything except olives and concrete, it’s fair to say this is going to be bad for Greece.

Does the European Union need Greece?
Yes. There are two reasons Europe needs Greece.
There are nineteen European countries that use the Euro as their sole currency. Having an economy as bad as Greece’s on the Euro weakens the Euro and that is a good thing for European countries that are exporters. A weak currency is a competitive currency. Basically it makes BMWs and Mercedes cheaper than Cadillacs. If Greece leaves the Euro, the currency could strengthen and become uncompetitive. The cost of bailing out Greece could possibly be less than the negative economic impact of a strong and uncompetitive Euro.

The European Union was founded in 1993.  No country has ever seceded from the union. If Greece were to completely default on its loans to the ECB and bail on the European Union, it would create a road map for other countries to leave too. Certainly Portugal and Ireland, who have had struggles of their own, are keeping a close eye as the Greeks stare down The ECB. The risk is that membership in the EU simply becomes convenient when the sun is shining.

What does this mean for you?
I don’t know. I honestly don’t really know why anybody cares so much. If you’re a Greek pensioner, I’ve got nothing for you! For the others, let’s re-hash some cliché Greek comparisons and see if we can make up a few new ones.

• 28 U.S. States have larger Economies than Greece
• 28 U.S. Metro Areas have larger Economies than Greece
• 22 U.S. companies are larger than Greece’s Economy

Speaking plainly, I think Greece is economically irrelevant. That doesn’t mean that the the Greek issues can’t cause bigger problems. Think of Greece as an experiment. An experiment that didn’t work. The Greek people have become accustomed to living like citizens of a productive and developed country; unfortunately, they haven’t come to grips with working like citizens of a productive and developed country. Now that the money has run out, they don’t want to give up their lifestyle and they want somebody else to pay. It will be important for the ECB and IMF to set a clear example in this situation. If Greece can strong arm its creditors then the whole concept of justice and faith in the European Union could change.

Investors need to stay focused on the larger objective which should be meeting long term goals. “We would never advise people invest simply because Greece is strong and we would certainly not advise people sell because Greece is weak.” As with all corrections, those with cool heads and discipline will take money from those who panic. We haven’t seen a 10% correction in almost half of a decade. Generally we average multiple 10% corrections in a single year. Today, U.S. stocks sit about 5% off their all time high marks. Maybe a little justice is just what this market needs. Well that and gyros.