The Greek Tragedy of Too Much Debt
One of the paradoxical things about the third Greek bailout is that it still does not address the underlying issue. Greece is bankrupt and there will be no permanent solution until Greek debt is either forgiven, substantially cut or Greece leaves the Euro.
It is being reported that the new bailout measures provide about 86 billion euros over three years. Which means that in the next few years when Greece runs out of money again, the country will be back in the news. The approximately 242 billion euros Greece owes creditors will likely never be paid back.
According to an article in Telegraph, the IMF warns that it will not take part in any Greek EMU bailout unless sweeping debt relief is agreed upon.
The article reports that the IMF said that there is no chance Greece will be able to access the private capital markets for the foreseeable future, which leaves the country completely dependent on the bailout. (Source The Telegraph 2015 July 15th)
According to the IMF in the article, Greece may need a full moratorium on debt payments for 30 years and perhaps even long-term subsidies to claw its way out of depression.
It is estimated that Greek public debt will reach 200% of GDP over the next two years. So without debt relief the rescue fund will not work. It is also being reported that the current bailout can not be approved without IMF involvement. So we’ll see where this goes from here.
Lessons from Greek Crisis
One of the reasons the Greek crisis did not have a strong influence on global markets was likely due to the fact that Greece is a very small part of the European economy. But it does highlight the complexity involved in debt defaults.
We have seen in Greece and Cyprus that as soon as a crisis gets escalated, citizens lose access to bank accounts and deposits. According to an article in ZeroHedge, capital controls have been in place in Greece since the beginning of the month to protect banks from mass withdrawals.
The article reports that Greek capital controls also prevent access to contents of safe deposit boxes. (Source: ZeroHedge 2015 July 14th) The next crisis is likely going to bigger that what we have seen in Greece and Cyprus. Which means it could have a more meaningful impact on the global financial system. This is why diversification into Gold and Silver stored outside the banking system makes so much sense.
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