Now that Greece officially has defaulted on its 1.6 billion euro ($1.1 billion) debt payment to the International Monetary Fund (IMF) and Greek voters voted ‚??no‚?Ě to the budget cuts the creditors had demanded in return for additional rescue loans, will Greece be the first country to exit the euro zone? If so, what does an exodus from the euro zone by Greece mean to European partners?
Warren Coats, a former IMF¬†official, said that the Greek government ‚??is one of the most incompetent governments I‚??ve ever seen.‚?Ě
I would be hard-pressed to disagree. Greece‚??s government has violated the three principles of good governance advocated by Ben Franklin more than 200 years ago: industry, thrift and prudence.
As I wrote in my e-letter last week, there is no need for investors to panic due to Greece‚??s irresponsible handling of its debt. Other governments that are bigger than Greece have defaulted and the world has found a way to survive these fiscal flops in individual countries.
Just think back to 14 years ago when Argentina, with an economy twice the size of¬†Greece’s, defaulted and world markets barely shrugged.
Three Reasons Not to Let Greek‚??s Debt Crisis Cause Panic
Here is my rationale for keeping a default by Greece in perspective:
- The size of its debt is not overwhelming for the global markets. Although Greece owes its creditors $271 billion, that amount is only one-third the market cap of Apple.
- European banks no longer are overloaded with Greek sovereign bonds, nor are they reeling from bad mortgages at home and other toxic debt. Those banks subsequently beefed up their capital base and off-loaded or wrote off much of their Greek debt. There is little chance of a banking crisis outside Greece.
- Markets have had plenty of time to adjust to adjust to Greece‚??s worsening debt dilemma. No one is going to be surprised if the so-called ‚??Grexit,‚?Ě or Greek exit from the euro, occurs.
Greece certainly has serious problems. Unemployment is high and nearly 40% of Greek children live in poverty. In addition, the country‚??s economy is one-quarter smaller than it was seven years ago. Plus, a return by Greece to the drachma and an exit from the euro would send interest rates rising and put the nation‚??s economy into further decline.
But Greece‚??s effect on global gross domestic product (GDP) will be quite limited.
As long as Greece‚??s problems do not spread to Italy, Portugal, Spain or Ireland, the fallout from the default will be muted. Early reaction from the bond markets indicates such risk is minimal.
At least so far, there is no need to panic the way Chinese investors did earlier this week. The Chinese market plunged on Tuesday and rebounded on Wednesday. Western investors are showing much greater restraint and with good reason.
You Blew It! Greece and the Rise of Failed States
‚??Greece is one of the most incompetent governments I‚??ve ever seen.‚?Ě — Warren Coats, former International Monetary Fund official
The failure of the Greek people to elect a competent government is a sad commentary on democracy. On Sunday, they voted ‚??no‚?Ě to any form of austerity to keep the country afloat after engaging in massive spendthrift policies for decades to amass debt that now is 160% of its gross domestic product (GDP).
Richard Rahn, a senior fellow at the Cato Institute and a speaker at FreedomFest, has just written a great column on failed states. I urge you to read it.
Sadly, there have been many failed states, such as the Soviet Union and the old Chinese regime under Mao. But there are a growing number of failed states today, including Venezuela, Cuba, Argentina, Yemen, Syria and Iraq.
The fact is that there is a way out. Just follow the principles outlined in the Economic Freedom Index. You need rule of law, a sound money system, limited government regulation of business and commerce (trade) and low taxes. See www.freetheworld.com.
I will be attending the San Francisco MoneyShow, July 16-18, at the Marriott Marquis. To register, click here. Mention priority code 038970.
In case you missed it, I encourage you to read my e-letter column from last week¬†on¬†Eagle Daily Investor¬†about how some investors overreact to crisis situations.¬†I also invite you to comment in the space provided below my¬†Eagle Daily Investor¬†commentary.