With These Three Moves, We’ll Save You From the Greek Debt Disaster

12 | By Shah Gilani

Sunday, in a referendum that featured a hefty 62.5% turnout, Greek voters rejected austerity by a landslide 61.3% to 38.7% margin.

Now the problems really begin.

You see, this isn’t just a Greek problem. It’s an all-of-Europe problem. It’s a U.S. problem. It’s a world problem.

And you’d better listen up, because it’s your problem, too… one that could deal your financial future a truly deadly blow.

Here’s the truth about what happened, how this mess was first created and what could happen from here.

And before we finish today’s talk, I’ll detail three moves that will armor-plate you against what could be Europe’s version of the U.S. meltdown of 2008…

Anatomy of a Disaster

The backstory in the Greek saga is important, because it’s not one you hear very often.

You see, it’s about a bunch of liars.

In order to get into the Economic and Monetary Union (EMU) of the European Union – meaning your country can throw out its old currency and start using the euro – the European Commission rules were that your country’s budget deficit couldn’t be more than 3% of your country’s gross domestic product (GDP).

Greece made it into the EMU by lying and cheating… with some help.

Figuring out that Greece’s budget deficit was higher than permitted, Goldman Sachs Group Inc. (NYSE: GS) – that bastion of American investment banking power, greed and prestidigitation – engineered some nifty currency swaps that let Greece hide its true deficit. And like magic, the country was welcomed into the EMU.

Once enrolled in the EMU, Greece – like all other countries using the common currency known as the euro – could borrow in the European capital markets, get loans denominated in euros and promise to pay back those loans with euros.

You see, everybody who uses the euro in the EMU knows what it is worth. One euro is worth one euro. If I borrow in euros and pay you back in euros, it’s all good and easy.

That’s the whole premise of the EMU – to make it easy for countries to borrow in a common currency and pay back loans in the same currency, because the value of it doesn’t change if you stay inside that money “system.”

Before Greece got into the EMU, it had its own currency: the drachma. If Greece had to borrow from EMU countries, it would have to get euros and convert them into drachmas so it could spend the loan proceeds at home. And when it came time to pay back lenders, Greece would have to convert its drachmas back into euros.

The problem with the drachma as a standalone currency, as with any currency, is that it fluctuated in value against other currencies, in this case the euro. If the drachma was to fall in value relative to the euro, Greece would have to come up with more drachmas to convert into euros to make interest and principal payments.

But all higher costs disappear if Greece uses the euro at home, borrows in euros and pays back its loans in euros. All it had to do was become a member of the Euro Club.

All the EMU members – many of which also lied about their budget deficits – wanted Greece in the club. That way they could lend Greece euros so Greeks could trade more with EMU countries and not have to worry about Greek currency fluctuations.

And so it came to pass that the Greeks borrowed a lot of money. Governments, to get elected, promised all kinds of things to voters and borrowed heavily to gift their constituents.

Of course, if you keep borrowing and don’t raise taxes to pay back what you owe, you don’t have much choice but to keep borrowing to pay interest on what you’re already on the hook for.

Fast-forward to that “Oh My God” moment when everyone realized Greece could never pay back what it borrowed.

All the lenders – meaning European banks – that fell all over themselves to lend Greece money were in a panic. The short version of this part of the story is that – because so many banks would go under if Greece defaulted – EMU powers figured they better buy the loans Greece couldn’t pay so greedy, stupid European banks wouldn’t collapse.

So with the help of the International Monetary Fund (IMF), the European Central Bank (ECB) and the European Commission – lovingly known as “The Troika” – bank loans to Greece were turned into “public” obligations. That means Greece would owe money to European taxpayers and, thanks to the IMF’s involvement, U.S. taxpayers and others.

This is why there’s been such a “What’s the big deal?” attitude about this. After all, the thinking goes, because Greece’s obligations are spread among so many financial lemmings around the world, no banks are going under.

And if they do default, who cares? Who cares if Greeks vote “No” and refuse to cut their pension benefits, refuse to boost their retirement age above 50, refuse to be taxed more and refuse to be devastated and humiliated by creditor demands to pay their loans off?

Banks won’t fail.

Here’s the part where you better be sitting down.

It’s not that simple… not at all.

Cooking the Books

Greece owes about $540 billion on its loans and outstanding bonds.

It can never pay all that back.

Not ever.

The Troika didn’t just “print” money to give to banks to buy Greece’s bad loans from them. The IMF, the ECB and the European Commission used various “facilities” they created to buy Greece’s bad debts.

The best example is the latest consolidation play the Troika made.

A Luxembourg corporation – the European Stability Mechanism, or ESM – was created. Its stockholders are the 19 EMU countries.

The ESM, being a corporation, issued bonds that were bought by central banks of the 19 countries, as well as by hedge funds, speculators and propped-up puppets like the same stupid banks that got into trouble lending Greece money in the first place.

Why would anyone pay cash for these bonds? Well, they were “AAA-rated” because they were guaranteed by all the EMU countries’ governments.

All along, the game has been “extend and pretend.” Meaning, keep lending to Greece so it can make payments with new money it borrows. That way Greece doesn’t default and lenders don’t have to admit they won’t get repaid – meaning those lenders don’t have to write off all those bad loans… a requirement that would have made most of Europe’s banks insolvent.

The Greeks, having had enough, voted “No” to any additional forced austerity measures and essentially said: “We back our government. If you lenders don’t forgive some of what we owe and you don’t work with our government to reschedule our debt in such a way that we don’t have to crush ourselves to pay you back, then we vote to screw you and default and not pay you back.”

European governments are scared to death. Their citizens and the citizens of the countries that back the IMF are now at risk because they are the actual “guarantors” of the AAA-rated bonds that were sold for cash to buy Greek debt from banks that would have all failed if they were still holding the bag in the event Greece defaults.

Of course, direct holders of the guaranteed ESM bonds – the central banks of each EMU country, the ECB, European banks that thought they were buying government-backed bonds and speculators – all are expecting to get paid back.

If the Troika doesn’t negotiate to cut Greece’s debts and reschedule almost all of its payment obligations – and Greece walks away from what it owes – all those ESM bonds will be worthless.

But wait. They’re guaranteed. So the 19 EMU countries that are equity holders in the ESM corporation will have to step up to the plate and make good on their guarantees.

Too bad no money has ever been set aside to make good on those guarantees. They are all “off balance sheet” guarantees. That means none of the countries have put their financial obligations, if they have to pay, in their budgets or on their balance sheets.

They never expected to have to guarantee anything.

A full default by Greece would require countries to make good on guarantees – to the tune of about $350 billion.

Armor-Plating Moves

Where will these countries get the money to make good on these guarantees? They’ll have to sell bonds. And what will those bonds be rated if they are bonds that are raising money to pay “AAA” guarantees that weren’t ever funded? And who will buy them?

No one knows.

The final nail in the coffin would be a country or two in the ESM corporation saying they weren’t going to tax their people to pay off Greece’s debts. In other words, they wouldn’t make good on their guarantees.

Or maybe their sovereign credit ratings will get knocked down and they wouldn’t be a “AAA-rated” guarantor. If there is any doubt about the guarantees that were made not being met, all the holders of those ESM bonds would have to write them down, taking potentially huge losses and bankrupting some of them.

Even if the guarantors make good, they’ll have to sell new bonds for cash. At what cost?

What if interest rates rise because no one wants to buy bonds?

What will happen to all the negative-interest-rate bonds out there now? (Their prices will collapse if interest rates rise.)

Who is holding those bonds whose prices could implode? (We’re talking about the same banks – and the European Central Bank – that got this mess rolling.)

What if the ECB – which is holding hundreds of billions of dollars’ worth of bonds – starts losing money on its inventory of bonds?

What if it becomes technically “insolvent?” (The ECB is already on the record saying it has no capital other than the guarantees of capital committed by the same EMU countries that issued “AAA-rated” guaranteed bonds with no real guarantee set-asides.)

Who will trust an insolvent central bank?

How will people look at other central banks around the world?

All this can be fixed. But whatever “fix” comes about, everyone knows this is merely another chapter in the “extend and pretend” game.

Then again, someone could sneeze, and this global-financial pyramid scheme could instantly collapse.

Here are three (and a half) moves you should make to protect yourself and to make a lot of money – if we even get close to a repeat of 2008.

Greek Debt Crisis Move No. 1

Be smart, be safe and put down stop-loss orders on all your positions.

You can always buy them back later once the smoke clears. And if you get to buy them all back a lot lower with the money you put in your pocket because you cashed in on the global rally in stocks and bonds, you’ll be a happy camper.

I’m not just talking about stocks. Make the same moves with your fixed-income positions – especially if you have capital gains on them.

So what if you have to pay taxes on your gains? Would you rather be looking at a devastated portfolio of underwater positions?

Greek Debt Crisis Move No. 2

If all hell breaks loose, you can move your cash into U.S. Treasuries: They are always a safe haven in a crisis, and if you get in early enough, you can make money as the prices of Treasuries rise because everyone’s charging into them in a flight-to-safety rush.

The iShares Trust 20+ Year Treasury Bond ETF (NYSE: TLT) is a good, quick way to invest in rising Treasury prices. It’s not the same thing as actually buying Treasuries, mind you, but it will work for you.

Greek Debt Crisis Move No. 3 (and 3A)

If European markets start to crumble, you can short the iShares Trust MSCI Europe Financials ETF (Nasdaq: EUFN).

You can also buy put options on EUFN. It’s an exchange-traded fund (ETF) that invests in European financial stocks, including banks – a group that could suffer a big hit if there isn’t a positive resolution to what could end up being a total Greek default.

Clearly, the European powers that be don’t want a catastrophe of that magnitude on their hands – or as their legacy.

So they’ll do what they have to in order to avert such a meltdown.

There’s always a chance they’ll fail.

But with these moves, you won’t.


12 Responses to With These Three Moves, We’ll Save You From the Greek Debt Disaster

  1. Al says:

    Shah, do you really believe all involved in ‘supporting’ Greece, believed the loans wold be repaid? I don’t! Blind Freddie would realize the
    Greek ethos with its downward financial record over many years, would not change.

  2. richard says:

    How is it that no one saw this coming? Anyone with decent credit experience could easily have projected Greek insolvency and default years ago. When they shortenened their retirement age, expanded their government employee rolls, increased their vacation time, while their GDP was dropping. Now we have the worst debtor-one with nothing to lose who can go on the EU’s version of welfare. How were the government entities persuaded to take over debts from private banks they knew were bad? Are European bankers and economists that stupid and incompetent?

    • Zubair says:

      The word is corruption. Corruption at the highest level and lowest level and in between is the root cause of it. Lies and denials are integral part of corruption and completes the picture.

  3. Kevin says:

    My best wish is that this “extend and pretend” game will come to an end, and the world will realize what hell the banksters wrought. And then we can have a worldwide recapitalization of nations and the elimination of the awful central-banking system that we’ve been unwilling sufferers under for the past 100 years.

    The first thing that should happen is Greece should say, ‘To hell with you that were stupid enough to give us money when you knew there was no way we could possibly repay you.” We need to eliminate a system whereby sovereign nations can enslave their citizens for the mistakes and overspending of the political class. To paraphrase Thomas Jefferson, a government should not be allowed to pass the debts on to the next generation; it should pay these out of their own income. This is because the unborn do not get a vote in how the money was spent; and also because it was considered immoral to do this.

    The second thing that should happen is Greece should have its Eurozone membership card revoked. This should be followed by any other Euro-member country being allowed to do the same at any time.

    The third thing that should happen is the Euro should die a proper death. Leaving the banksters with what they deserve– a whole butt-load of who-owes-you-nothings.

    Only then can the world’s financial system be set right.

  4. Paulette says:

    Shah, thank you for the very good article that explains the EUR situation so well, it confirms that when carefully examined, the EURO is a giant swindle, though I am not American I feel like saying the best prohibition gangsters could not have imagined it because it is perverse and complex. Hopefully EURO can help to catch gangsters and terrorists, thanks again for your article.

  5. James says:

    Greece :The law of Cause and Effect in full action
    Because GS saw an opportunity to profit from working with the Greek leaders of the time to fix the books back then, allowing Greece to join EU, the effect is upon Greece and it’s leaders of today. Why is it that neither the EU or Greece has taken action by suing Goldman Sachs for 560 billion€ for financially engineering the books so Greece could lie to become a EU member. It shows one awesome thing, when you as electors elect a government to run your country, as electors when the elections are over, you can never take your eye off what actions those who are elected are up to behind the scenes. A strong independent press and judiciary is vital to ensure they stay clean and straight and keep their hands out of cookie jar.

  6. Carlos Alberto Cassis says:

    A very good economic and practical lesson of a wild and dangerous financial system until now.

  7. Michael Douglas says:

    Of course it didn’t make it any easier on the Greek people that they were swindled out of billions of Euros at the time of the original loan, by Papandro, an American Hedge fund owner, and the Troika. I have heard this several times on news programs and am curious to get the details about it.

  8. Sotirios says:

    You forgot how many countries did exactly the same like Italy , and not mention it until they elect a lefty party ,they admit it openly my dear investment”guru” but what can I expect from greedy pigs like you the truth?

    • Sotirios karamouzos says:

      Many eu countries they did exactly what Greece did but what can we expect from capitalist greedy pigs the truth ?o only what it sells and make money ,

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