Not just Greece, Anymore
Research for Online Investors

by John Dalt

6/15/11

Greece is in turmoil.  Protesters are throwing Molotov cocktails in Constitution Square, close to the Parliament building.  Riot police are standing their ground using tear gas to slow the crowd, but the mix is toxic.  Prime Minister Georges Papandreou has offered to resign.  He is a socialist and his party enjoys a majority in the parliament, but events are rapidly spiraling out of control.

We have written about the Greek sovereign debt problems many times over the last sixteen months.  The eurozone finance ministers, European Central Bank (ECB) and International Monetary Fund (IMF) extended $158.1 billion dollars to rescue the country last year.  Greece has cut spending and raised taxes in the last year, but not enough to bring their budget deficit in line with the guidelines agreed to last year.  Greek citizens are expert at avoiding taxes in the underground economy.

Greece needs more money soon to pay maturing debt.  According to Reuters, they are scheduled to receive $12 billion from the Eurozone Financial Stability Facility (EFSF).  This is money from other eurozone countries that must be repaid.  The IMF will not advance more money if the European money does not arrive.  The EFSF will not advance more money until the Greek government agrees to legislation incorporating the austerity measures the Prime Minister agreed to last year.

A vocal minority (mob) in Greece does not want the government to cut spending on social programs or sell national assets.  Moody’s said they may have to downgrade the ratings of French banks because of the large amount of Greek bonds they have on their books.  Germany will not agree to more aid to Greece unless current bond holders extend terms on existing bonds.  This would avoid redemptions in the next few years that would require Greece to borrow more money.

The Euro is falling; French banks are off by up to seven percent.  The German demand that existing bond-holders extend their terms has thrown the timeline of approval of aid to Greece in limbo.  Eurozone finance ministers expected to approve a second lifeline of money to Greece next Monday.  Now it may be July…which is too late for Greece to avoid default.

The ‘contagion’ is spreading.  If Greece defaults, all their bonds will be downgraded to junk.  Every bank and insurance company that owns them will have to write them down and increase their reserves.  Eurozone banks will be downgraded.  European interest rates will rise because the ECB cannot print money like the U.S. Federal Reserve.

Can you say CREDIT CRISIS?  It is not just for Greece anymore.

The U.S. dollar is spiking higher, crude oil is down.  Gold and silver were down earlier, but have moved back into positive territory mid-day.  U.S. markets are giving back all the gains we made yesterday.

White House and House of Representative negotiators are working on automatic triggers to cut spending to reach agreement on raising the debt ceiling.  Reuters reports that Republicans want to place a cap on Federal spending below 20% of Gross Domestic Production (GDP).  Mitch McConnell, Senate minority leader, wrote "The key to success...is for everyone involved to view the debt limit vote as an opportunity to reduce Washington spending now and save taxpayers trillions of dollars over the long term."

The mailbag:
You hit the nail on the head when you pointed out than none of the republican debaters pointed out the lack of drilling in the gulf nor Boeing's problems in creating new jobs in South Carolina. Those two items alone, they could have knocked it out of the park…but they didn't.—Long Term subscriber E.H.

I live in Texas. We love new business growth here, but we don’t want their old way of beliefs. They can leave them back where they came from. That is what got them in trouble before.  We used to have a sign at the courthouse in Midland, when we were having a large influx of new people that read " We don’t care how you used to do it, Welcome to Texas"---subscriber L.H.

John’s reply: One of the problems with immigrants from California is they want to bring their wacko environmental, tax, and regulatory ideas with them, poor Idaho & Colorado.  Good for Texas!  Keep your eyes on 'em.

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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