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Money Times - April 28, 2015

Posted by Jill Kerby on April 28 2015 @ 09:00

 

ARE WE CLOSER TO A GREEK DEFAULT? OR MORE ‘MUDDLING” ALONG?

ARE WE CLOSER TO A GREEK DEFAULT? OR MORE ‘MUDDLING” ALONG?

Is Greece going to default on its next debt repayments to the ECB, the IMF and its EU state lenders, including Ireland?  Their next IMF payements are in May and June and then there are big ECB payments as well – over €4 billion in total.

It took some doing for the Greek government to meet the April 9th deadline to pay the IMF the €450 million it was owed. It had to postpone paying its own bills to Greek companies with whom it does business and “redirected” EU farm payments from the expectant farmers, to its own coffers.

Since then all Greek institutions with any cash on hand (like local authorities, or the social security fund that pays pensioners) are being told to turn those euro over to the Greek central bank…er, for safekeeping. (That’s akin to leaving your dog with the taxidermist when you go on holidays. Yes, you’ll get the dog back…)

If Greece does default on its troika repayments what happens to the euro? Will a Greek default cause other countries… gulp, like Ireland, to have to pay more for the billions we still borrow from the international, open “debt” markets, now that we no longer depend exclusively on troika loans?

And if the worst does happen, will the European Central Bank, as the Eurozone’s own bank of last resort, again promise “to do what it takes” to reassure international lenders that there will be no future defaults?

It is already, of course, printing €60 billion a month until the end of next year in order to prop up the floundering EU-wide economy and keep borrowing rates as low as they have ever been.

Frankly, the most important question to me (and perhaps to you) is what would happen to my euro savings, my investments, pension, job, etc…if Greece defaults.

I wish I had that definitive answer, because I would certainly share it with you.

Instead, I can only offer a relatively educated guess:  that either the troika will blink and write down a huge part of Greece’s debt by printing yet more euro…and/or Greece will default anyway.

I write this because the troika endorses the modern ‘too big to fail’ school of economics which means that no country (other than Greece, maybe) is ever allowed to leave the euro. However, I also suspect that the game of brinkmanship that the Greeks and EU have been playing since 2011 appears to have come to an end: the Greeks have emptied their piggy banks and found all the spare euros hidden down back of their collective sofas. They still don’t generate enough productive earnings or collect enough tax to pay their domestic or international bills.

The kindest thing an increasing number of commentators are suggesting is to encourage the Greeks to leave the eurozone and then negotiate fair, honest and generous bankruptcy terms – a massive debt write off. They can then try to slowly but steadily rebuild their economy from a clean slate with the help of lots of inward investment and trade.

Writing off a large chunk of Greece’s c€330 billion debt would leave the troika, which now accounts for most of these loans, with a big hole of their own and it would certainly impact on their future ‘rescue’ terms for the rest of us.

Interest rates might rise. The euro might fall further in value against other currencies. Already it is down 25% against the US dollar and c15% against Sterling, making travel to the UK and US. Imports are more expensive too though exporters (our current job creators) are happy enough.

So what can you do to protect your savings, wealth, pension against a Grexit?

First, don’t under any circumstances leave more than €100,000 in any single Irish or eurozone bank. Only that amount is guaranteed in the event of any domino-effect if Greek banks fail.

Next, bond yields:  they could end up going up if borrowing costs to EU countries (especially the weak, indebted ones) rise. Interest rates on retail borrowings could follow. This would be very bad for debtors, so you might want to try and avoid taking on any extra debt or reduce the debt you have.

High bond yields (interest) will push down bond prices, something pension fund managers might welcome since bonds underpin a lot of pooled pension funds we save in and are used to produce retirement incomes. However, falling bond prices will cause losses if existing bonds are traded/sold before maturity.

Confused?  This is macro-economics in full flight, so I’ll repeat for the 1,000th time – if you haven’t had a ‘wealth’ check, arrange one with a trusted, experienced, fee-based adviser.

You need to weigh up risk, your attitude to risk. Depending on your age, income, dependents, you also need to try and balance those risks with diversified assets – cash savings, shares, property, bonds and maybe a little gold (for insurance) – and as little debt as possible.

If you have a personal finance question for Jill, please email her at jill@jillkerby.ie or write to her c/o this paper.


 

 

 

 

 

 

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