Wednesday, June 22, 2011

Would You Buy A Greek Bond?

The Greek economy is falling apart and its people have rioted over the severe financial cuts their government is trying to force on them as part of last year's European Union (EU) and International Monetary Fund (IMF) bailout. As we sadly and humbly predicted last year, Greece will default on that bailout.

The EU and IMF are discussing a new bailout with Greece but if a new bailout were done, it too would fail, for Greece is broke and putting them deeper in debt and more severely taxing its people, while cutting their wages further and slashing the retirement benefits of their senior citizens is not the answer.

What you don't see is behind the scenes, giant French, German, British and likely U.S. banks, along with U.S. money market funds and other huge investors from around the world bought the earlier Greek bonds and are now confronted with having to take massive losses on them. So instead, the 1st bailout took place shifting the entire burden on to the Greek people and now a 2nd bailout is being concocted. But the Greek people won't stand for it, for they are not the ones being bailed out, their bondholders are.

Why did all these giant investors buy those risky bonds. Because those bonds paid far higher returns than many other more conservative investments. But the reason they paid so much more was because of their risk and now as those bonds default, those losses must be taken. How bad is the problem? Greece a nation of just 11.3 million people owes 280 billion Euros ($400 billion)!

The EU and IMF will try to continue the earlier bailout to help these huge investors avoid taking the losses. This too will fail for the Greek people can't afford the old bailout nor a new one. In addition, Ireland and Portugal can't afford their bailouts and they too will default, once again forcing giant bank and money fund investors to face huge losses. Spain and Italy are next for they too are broke. The whole European financial system could implode, when these banks and money funds take these losses as part of appealing to their governments for "too big to fail" taxpayer bailouts. Add in England, which is also broke and the U.S. which is stunningly broke and the entire financial system is ready to implode. But the politicians in Europe and in the U.S. will try to postpone the day of reckoning for as long as possible.

So would you buy a Greek bond? You can buy them right now at a huge discount if you have a strong stomach for risk.

Dick
For more information, please see: "Europe Shifts Path for Greek Rescue," The Wall Street Journal, 6/18-6/19/11
http://online.wsj.com/article/SB10001424052702303635604576392080582974272.html?mod=googlenews_wsj

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