Never a Borrower or Lender Be
Research for Online Investors

by John Dalt

6/20/11

The Greek crisis continues.  Markets rallied going into the weekend on optimism that a solution would be found over the weekend to extend more aid to Greece.  Prime Minister Papandreou shuffled his cabinet and replaced his finance minister on Friday.  He appealed to the country that more austerity measures must be approved.

Eurozone finance ministers met into the early hours this morning.  They held out the carrot of more aid to be made available in another package if the Greek government completed a ‘compliance report’ listing the austerity measures the country would undertake.  The last tranche ($17 billion) of last year’s $156 billion rescue will be considered at a special meeting of the Eurozone finance ministers on July 3rd.

Greece has until then to put their house in order.  The government has announced the planned sale of airports, highways, state owned banks, real estate and some gambling licenses.  Last year’s bailout required Greece to raise $71 billion in such sales by 2015.

The Socialist party holds a slim majority in the Greek parliament.  Prime Minister Papandreou is expected to hold a vote of confidence on his new cabinet tomorrow.  If he clears that parliamentary hurdle, the new Finance Minister, Evangelos Venizelos has less than two weeks to pass legislation to tighten the belt on the county’s budget. CNN reports, he is expected to propose a reduction in pay for public workers and a freeze hiring.  This would reduce the public employee head count through attrition.

Greek Prime Minister Papandreou and Finance Minister Evangelos Venizelos

The government has increased the retirement age to 65, tightened eligibility for disability benefits, raised taxes on gasoline, cigarettes, alcohol, and other luxury goods.  They have also increased the sales tax in the last year.  Unemployment in Greece has increased in the last fifteen months from 11.6% to 16.2%.

Protesters in Greece blame their government and the banks.  They think the banks should take a loss on Greek debt.  What did the banks do?  Loan the government money to continue spending.  The Greek newspaper Eleftherotypia carried the headline “The Stupidity of Europeans.”  Reuter’s reports the article advocating European countries should incorporate Greek debt into a federation of European states to save all the economies.

The Finance Ministers are working on a plan to extend Greek loans through 2014 at low interest rates, so the country will not have to access credit markets for another three years.  They will work on this in July.  Any required extension or “restructuring” of debt on private holders would lead to a credit downgrade by rating agencies.

Standard and Poor’s downgraded Greek debt last week to just two notches above junk status.  If Greece does not satisfy the European finance ministers by their special June 3rd meeting, they will miss interest payments on debt that are due in July.  Greek debt would be downgraded to “junk” and banks across the Eurozone would immediately be insolvent.

The banks with the largest exposure to Greek debt are in Germany and France.  There is a lesson to be learned, “Never a borrower or lender be.”

The mailbag:
You are on shaky ground when you decry regulations. You can pick and choose from among the gazillions to find some that are awful, but without them society would be cutthroat, mean and miserable. I am writing from Canada right after visiting a museum featuring among its many artifacts an 1851 edict from the town wherein I'm staying declaring it is impermissible to bathe in streams and rivers in city limits between 6 AM and 6 PM.---subscriber J.R.

John’s reply:  We can all agree public bathing in streams and rivers before sundown should be discouraged!  Individual economic freedom does not make society cutthroat, mean and miserable.  It does make it less “organized.”  On second thought; “cutthroat, mean and miserable” all sound like pretty good training for competition in a world economy.  Does China worry about fair?  We better toughen up, or be prepared to take the back seat.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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