Tuesday, April 27, 2010

Greece Slips and Slides in a Downward Spiral

Greece's financial woes have been mounting for over a year now, but the rest of the world seems to have only started paying attention in the last 6 months.

The signs were there in January 2009 but many didn't seem to notice, and this article's analysis did not seem to think that a bond default was a possibility.

Unfortunately, the downward spiral of Greece will not be contained to Greece, as this impacts the Euro, as well as everyone else. While Greece may be looking for a bailout from Germany, Germans are a practical, thrifty, people and I don't think a bailout is going to be acquired so easily. Germany will be looking at the risk and the return on investment. This doesn't look good for Greece, when you think of what does Greece actually produce?

Greece may have tourism as an industry, but in a downward economy, tourism suffers. Since Greece is a socialist economy without other industries that are significant enough to generate sufficient economic growth and revenue in tax dollars, and it is plagued with citizens looting the producers, how will the debt be paid? Eventually the bill will come due.

Raising taxes is a habit of the excessive government spending regimes, but there is not enough revenue from it's own citizens to tax. So Greece is turning elsewhere, and has tourists on their radar. Taxing the one industry that generates revenue is completely idiotic, as it will discourage tourism as tourists will seek to spend their money elsewhere to get more value for their money. Britain seems to be assessing the additional taxes to be imposed.
"The constant in these examples is a country that, for a period, is allowed to live well beyond its means – in most cases by yoking its currency to another, and borrowing like there's no tomorrow. When tomorrow eventually arrives, investors wise up, realise their money is at risk, and get the hell out of there."

"Everyone knows that, at some point, our Government must tackle the deficit and overhaul the welfare state, which is the largest drain on the public finances."

Greece's welfare state of borrowing and spending is coming back to haunt them. S&P downgraded Greece debt to BB status, and that may not be the bottom.
"The downgrade put Greece on par with Romania and below Kazakhstan, Hungary and Iceland, the last of which rocked global markets when its main banks imploded at the start of the global financial crisis."

"S&P cited the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory."

"Even if Greece obtains international aid this year and over the next few years, many analysts think its uncompetitive economy may continue to struggle in the euro zone's monetary straitjacket, ultimately forcing a debt default."

The main issues are that the Greek government is corrupt, the economy is socialist, and the debt ratio to the GDP is unsustainable.

Unless you have investments in Greek government bonds, you may be wondering why you should care. If you look at the Greek model, and look at the current Obama administration's spending and socialist policies, it is clear that Obama is bringing America down the same path as Greece. Eventually, the US debt will be just as unsustainable, there won't be enough revenue to tax, and the economy will come to a crash. If Greece is now on par with Romania, where will America end up?

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