Understanding the world's debt problem... Greece is the word

By Mike Jones, posted February 19th, 2015

There is an old saying, "it takes money to make money." But when that money is borrowed money you also must have the capacity to pay that borrowed money back. 

In the case of Greece, their debt to GDP ratio is at a point where no country could ever hope to afford to pay its loans back.

Economist John Mauldin writes:

Greece can probably fund itself into March by stretching out payments and engaging in a few bits of financial chicanery. But if the [European Central Bank (ECB)] does not extend their financing past February 28, the Greek banks are finished as solvent institutions. The ECB is basically saying that unless Greece agrees to continue to honor its agreements, funding will not be renewed or extended.

Alexis Tsipras, Greece's newly elected Marxist leader, has risen to prominence by promising voters that the people of Greece need not abide by the austerity measures agreed to when they were bailed out 3 or 4 years ago.

So the clock is indeed ticking. Greek bonds have been rated just one level above default. The S&P outlook is "negative." 

It is not at all certain what the Greeks will want to do. If they leave the Eurozone there will be financial calamity. Lenders will lose billions. Greece will plunge into depression. If they stay in the Eurozone without huge (and I mean H-U-G-E) concessions the country cannot prosper.

In the end the best hope may be "shared pain."  Europe is too fragile at the moment to lose Greece completely and amortizing losses or costs over long periods of time always seems to placate financial markets. But only time will tell what the outcome will be.

In the meantime, all market participants will want to keep the news from Greece front and center.

Mike Jones is Managing Director / Investing Group of Argent Advisors, Inc. Email him at mjones@argentmoney.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5844. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.