Greece is Stuck

A great deal of speculation surrounds the financial and political crisis gripping Greece.  The country’s politicians have mismanaged government finances for years and while a brief reprieve was given by the European Union a few years ago, the problems continue to crop up.  In simple terms, the country has been spending more than it takes in from taxes.  The problem is easy to spot but difficult to fix.  Neither spending cuts nor tax increases are politically popular, so Greece continued to borrow until it could find no other lender.  Upon reaching this point, choices were, and remain so, limited.

Now the game of “Chicken” begins.  Does the European Union buckle and provide more funds, or does it let Greece default, diminish its chances of collecting on past loans, and escort Greece out of the Union? 

The contribution of Greece to the European economy, and even less so, to the global economy, is modest.  But, the signal it sends to the world has the potential to generate further reaching consequences.

First, if the European Union extends Greece additional loans on even more favorable terms than in the past, other struggling countries in the Eurozone (Italy, Portugal, and Spain) will certainly also come back with hat in hand, looking for similar terms.  Corruption will be facilitated.  Any modicum of responsibility will be lost, and the virtue of a solidly functioning European bloc will be weakened.

On the other hand, refusing additional financing, and letting Greece leave the Eurozone, will likely push the country to align with Russia, which is already viewed with alarm by European leaders trying to manage the Ukrainian crisis.  This would represent another domino, and the risk of further armed conflict rises.

My suspicion is that Greece will get more loans from the European establishment, and the terms will be modified, but will still require reforms by Greece.  Time will tell if the country will comply with the new terms.  Greece has a reputation of being slippery.

All comments and questions are welcomed.

Bob Bilkie, CFA®