Forums / Property Investing / General Property / Greece & The European Union… Crisis Averted Or Impending Doom

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  • Profile photo of SiteAdminSiteAdmin
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    The text below was written by Steve McKnight in his weekly update (14th May). What are your thoughts and comments? All viewpoints welcome!
     
    You've probably heard the news that richer Euro countries and the IMF have found a lazy 500b euros to bail out struggling European Union countries that have immediate and crippling debt repayment problems.

    In case you're wondering what all the fuss is about, consider this: if dodgy US home loans sent shockwaves around the world and caused major financial houses to fold, imagine what would happen to financiers around the globe if several major countries went bankrupt? Assuming you could borrow, it would be at much higher interest rates.

    If you're wondering how Greece etc. got into such a poor financial position in the first place, the answer is simple: they spent more than they earned (from taxes and revenue), and funded the difference with debt (issuing bonds).

    This is common enough, but a crisis unfolds for countries that cannot produce enough output to pay both the ever-increasing interest AND the principal on the debt. So, for the first time in a long time, investors holding sovereign Western government bonds (many of which are banks and other countries) faced the prospect of not being repaid.

    Those unable to repay had to come cap in hand and ask richer European countries like France and Germany to lend them the money to repay their immediate loans. Once upon a time this wouldn't have been considered, but with a central European currency, it's harder to turn your back on a desperate Euro Union cousin.

    How would you feel if you had a family member that consistently squandered their cash while you worked hard to save, only to turn up on your door and ask for a handout to avoid going broke? Now you can see why the idea of bailing out the free-willed Greeks is unpopular among the less haughty Germans.

    While all seems okay at the moment, you can't swap billions of dodgy bonds for cash without serious longer term consequences. In the very least, Greece, Portugal, Spain, Ireland etc. are in for an extended period of lower living standards on the back of diminished economic growth and higher unemployment. Try telling someone they need to have a frugal retirement after paying a lifetime of taxes and see how many turn out for an angry demonstration!

    But the truth is an unsustainable standard of living got them to this position (i.e.. spending more than they earned), and until this basic problem is tackled and fixed, the financial hole being dug will only get bigger and bigger.

    The word for 2010 is 'austerity', and when applied to finances this means being sober, stern and strict with your spending and outlook. Our grandparents, coming out of the Great Depression, knew what being austere meant, but those aged under 40 have little clue because they've been able to get whatever they wanted on credit and worry about the consequences later. Or so they thought.

    The lesson to learn here is simple: it doesn't matter if you are a country, a business, a household or an investor – you can't spend more than you earn indefinitely. Sooner or later a reckoning will come, and when it does, if you can't repay your debts you'll go broke.

    Is the situation in Greece also a timely wake up call for the way you manage your money? What do you need to change to ensure you spend less than you earn? Perhaps it's time to reconsider holding underperforming assets heading into a less certain economic climate.

    Profile photo of jv_ozjv_oz
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    Now on top of the excellent analysis above, overlay the demographics of Europe and the impact of an aging population.  Normally you need 2.1 births per female to maintain a population.  If you can't get that (Australia has about 1.75), then you need migration to boost it.  Italy has about 1.2 births per female and much of Europe is in a similar position, so they quite simply will not have the residents to not only pay back the debt long term, but also to maintain demand and keep their economies functioning.  If Greece in particular, but most of Europe were a company, would you buy shares in it?  I know I wouldn't for a long term play!

    Profile photo of lailai
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    Excellent! Steve, as always an objective, level-headed analysis of an emotionally-charged situation is much appreciated.

    Not out of the woods yet; globally we're all in the same cookin'-pot (even for the lucky country)!

    DV

    Profile photo of AvantiAvanti
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    What opportunities does the situation in Greece, Spain, Ireland etc…… present in terms of property investing within those countries? 

    Profile photo of andykirbyandykirby
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    Hi Steve,

    Lots of interesting points in a well thought-out pice. A couple of extra facts to add into the mix;

    1. You mention that they spent more than they earned (from taxes and revenue) and this alludes to one of the major points differentiating the Greece situation with other countries. Greece has a chronic tax evasion and corruption problem. According to this Bloomberg report (http://www.bloomberg.com/apps/news?pid=20601109&sid=apSz28ifLL9U) 95% of Greeks declare an annual income of less than 30,000 Euros a year (just over $40,000 per year), and tax evasion and corruption is estimated to cost the country 5Bn Euros per year. Over recent years, to get the revenue the government increased taxes to try and recoup the revenue, which only encouraged those paying their taxes to stop paying them! If the government can actually sort this problem out, they'll go a long way to getting back on track.

    2. Other countries in trouble, such as Ireland and more recently Spain, have taken their medicine and cut costs in things like civil servants pay. People aren't happy about this, but realise that this has to be done. For example, the Irish budget at the end of 2009 included cuts of 5Bn Euro (thier Prime Minister took a 20% pay cut!) and they're forecasting a deficit until 2014. Pay was cut, benefits were cut and investment in infrastructure was delayed. I imagine that people were not happy but there was no rioting in the streets of Dublin. People most likely realised that it had to be done.

    Finally, if you're thinking of investing, speaking as a person who still has family in the UK in my opinion the currency differential between the Aussie and GBP / Euros would be a good starting point!

    Profile photo of joshua.moorejoshua.moore
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    I think Microeconomics and Macroeconomics are intertwined…

    The only way for a country to remain financially healthy is if individuals do their best to remain financially healthy.

    I can only discuss what I know from my limited experiences (at 22), but this is what I know:
    – I will be graduating at the end of the year from a Bachelor Degree. I have a job lined up and will be paying off my HECS debt as quickly as possible (no debt is good debt in my view).
    – I will be spending less than I earn and will stay at home as long as I can afford to.
    – I will be saving as much as I can and investing in areas where I have an information advantage and know more than the general population.

    Steve, I think that even though Greece is struggling we also need to look at our own country. Everyone has been happy to receive the money Rudd has given them over the last few years but we are still spending tomorrow's money to live today. We as a country (full of individuals) need to take action to reign in our spending habits to ensure we are able to repay our national debt and to ensure that we don't end up in a position similar to these countries.

    $200 billion might not be a lot compared to other countries, but when you look at our population size and the fact that the richest person in the country is worth less than $10Billion, we are still in a difficult predicament.

    Short term solution= Long term pain.

    Short term pain = Long term solution.

    I've had to sacrifice financially to obtain my degree to ensure I have a better knowledge and income longer term. I believe if we sacrifice our short term needs we can ensure the long term prosperity of our nation.

    Regards,

    Josh Moore.

    Profile photo of wezwazwezwaz
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    Don't totally agree with you, Steve.

    Economies (countries) seem to play by a different set of rules to individuals. They shouldn't, but they do. An individual can have the rug pulled out from underneath them quickly and be bankrupted. Not countries, oh no. We've just had it with Greece. They should have been cut loose for their useless mismanagement of money. But no, others came to the rescue, "You want bailing out? No problem, here's $160 billion to do as you wish. We don't have it either, but so what, we'll just pluck it out of thin air, rack up more debt ourselves. Who cares?" Brilliant!

    I really don't get it. Many countries are in debt. I guess the only thing that separates them from Greece is they magically find a way to service it. Take the USA. Are they any different to Greece in their mismanagement of money? The GFC happened because useless managers charged with managing finances absolutely failed in that duty. Until the world stops attempting to extract more from a system than it is capable of providing, we will be in the crap. The growth in products and services simply does not match the value we want to place on them. That balance must be restored. How that is achieved and how long it will take is the $64 trillion question.

    Look at it this way. If one has too much debt, you are going nowhere until you suck it up and take your medicine! What that means is forget growth because it can't happen when you are in dire straits. That's pumping a dead horse. No, you need to reduce debt to a manageable level until the balance is restored. Only then can you look towards growing again at a sustainable rate. Anything else and you're kidding yourself. Think of the word "greed". Sure, we all want more, but the world is in no state to be getting it.

    I remember someone once saying money is an illusion. At the time I thought that was a pretty vague and meaningless concept. I think I now know what it means. You only have to see how amazing amounts of money are plucked from nowhere. It's ridiculous and should be stopped dead in its tracks. Stop using alchemy! It's illogical and completely unethical.

    …and to finish with a question that I hope someone can answer. What is a bailout? Now, no vague, airy fairy explanations please. Explain to me the nuts and bolts of how a bailout works. Where does the money come from, i.e. do the countries providing the money actually have it? Does it get paid back? I'm all ears and look forward to someone with real knowledge of how this works. Thanks.

    Profile photo of kong71286kong71286
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    I strongly agree with Steve's comments above, especially about the importance 'spending less than you earn'. Countries such as Greece, Portugal, Spain, and Ireland are in the situation they are in today because they are living beyond their means. Fortunately, these countries can be bailed out, but what happens if the country is too big to bail out? I have a feeling that something of GIGANTIC proportion will occur within the next 7 years, and that there will there will be the biggest transfer of wealth in the history of mankind

    Profile photo of coalstarcoalstar
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    germany should pay back greece 100 billion dollars worth of gold (1940’s worth ) it stole from greece during world war two

    Profile photo of cinooocinooo
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    Good post wezwaz, you are spot on.

    What is a bailout you ask? A bailout in todays terms simply means printing more money using the printing press. With the collapse of Greeces economy and the actions of the european central bank the message they are essentially giving out is that they will fund any euro related country by printing more money and thus creating money out of thin air as you say. This is what the US has done to get themselves out of the GFC trouble and this is the same path that Europe has been following.

    But the question is are they really out of trouble? The answer is no. They are only postponing and creating even more of an imbalance in the economy so that they can sustain their current economy without going into a proper recession. Instead of cutting spending they are instead increasing spending and increasing their debt – debt which they can not pay back.  Even though the DOW today has gained back much towards its previous levels, it is nowhere near the same value as it was before as the USD is also no where near the value it was before. The USD will continue to devalue due to the debt they are taking on and inflation they are creating. How do you think they are paying off their debt? By printing more money of course and thus further debt is created and cycle is repeated only the effects are worse each time.

    If we have Europe becoming a net borrower then we will have both a devalued Euro and devalued USD. This may push the creditor countries (China) to the brink sooner than we may think.

    Profile photo of wezwazwezwaz
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    Printing more money; taking on more debt…where does it end? We have had some disastrous failures in the past few years. One suspects it is inevitable we are in for the mother of all crises sometime in the future. It has to happen, simply because global economies will not take their medicine.

    To a "simpleton" like me, growth in money supply can only occur with equivalent growth in products and services. Is it any more complicated than that? Globally this equation has failed because the growth in money has far exceeded growth in products and services. Why do governments let this happen? Because they have rocks in their heads! No-one wants to see growth disappear, so governments continually try to prop it up. Unfortunately, that is ignoring the reality of the situation. Shrinking economies should be the reality. Tell me I'm wrong.

    If you or I destroy ourselves with debt, no-one comes along and says, "No worries, I'm going to bail you out – here's $1 million." Why not? Countries get away with it. What am I not seeing?

    Profile photo of lifeXlifeX
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    Very Interesting comments.

    If all the central banks and major economies are printing money faster than ever before, surely the value of money has to be decreasing at the same rate.

    This would resolve all the government debt. issues as their debt would be reduced to nothing.

    History tells us that this is what governments do when they have no other option.

    Unfortunately it means the price of living sky rockets and no-one can afford to buy anything. With long protracted periods of poverty for the people.

    I hope we aren’t headed for hyper-inflation……

    …Maybe time to bury some gold and baked bean cans just in case.

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