Latest Greek Debt Deal Doesn’t Solve the Problem

Stocks soared the last week of October after European Union leaders announced a deal that will cut Greece’s mounting debt load in half. But does this solution actually solve the underlying problem of too much Greek debt?

The rescue plan includes another 130 billion Euros in bailout money courtesy of the International Monetary Fund (IMF) and euro zone, plus a deal that convinced certain private investors in the European Union to voluntarily take a 50 percent loss on their Greek bond holdings.

In theory, the deal will prevent the damage to the debt-ridden country from spreading further to other countries and reduce Greece’s debt to a still very sizable 120 percent of GDP by 2020. While still high by global standards, the future debt load will be reduced from where it currently stands at 180 percent of Greece’s GDP, so it is still a step in the right direction.

As it did in previous Greek bailouts – the country already received a 110-billion euro bailout a year ago – the market briefly embraced the latest rescue until Greek Prime Minister George Papandreou proposed a public referendum on the deal. He promptly withdrew the proposal last Friday in the face of a no-confidence vote, and now Papandreou is expected to relinquish his prime minister seat in the face of heavy scrutiny.

But the deal is little more than a band-aid that will only temporarily stop the bleeding. Greece’s debt load is so great that a default remains inevitable. And with some yet-to-be-determined Greek bond-holders accepting 50 cents on the dollar, it’s obvious that while Greece may avoid default in the conventional sense of the word, the country sure isn’t making its bond investors ‘whole’.

Greece has been racking up debt for years – decades really. Public sector workers’ wages nearly doubled in the last 10 years. Pension payments to retirees ballooned to 92 percent of pre-retirement salaries – one of the most generous pension systems in the world. And tax evasion has long been an epidemic in Greece, making it exceedingly difficult for its government to offset its considerable spending through tax revenues.

It seems unlikely that Greece can undo decades of bad spending decisions with a simple bailout by its European neighbors. On top of all the debt Greece has accrued in recent years, its economy has experienced extremely slow growth, unable to keep up with all the money the country has been losing.

That’s part of why the European Union initially rejected Greece’s application to join the EU when the euro currency was created in 1999.

Greek debt is still growing faster than its economy and analysts say that trend will continue even after a bailout, so austerity measures will only further slow down the country’s already anemic economic growth.

As was the case prior to the latest rescue plan, Greece is a country in such financial disrepair that the only solution is to allow it to default. Too many other European countries have already suffered on its behalf.

Private banks in Belgium, France, Germany and other European countries own much of the debt owed by Greece, and they’re the ones who are being asked to take a 50 percent "haircut" as part of the latest rescue plan.  

Considering that one Franco-Belgian bank, Dexia, was already bailed out last month by the French, Belgian and Luxembourg governments because of its exposure to Greek debt (sending its stock to a 52-week low as of last Friday) that’s not a positive development for Greece’s fellow European Union members.

Belgium, France and Germany are among the few European countries that aren’t in a financial pickle at the moment. Italy, Ireland, Portugal and Spain already face massive debt loads that closely resemble the problems in Greece. The European Union should be focused on strengthening its stronger members, not leaving them with the Greek debt tab.

Repeated bailouts, "rescue plans" and debt relief efforts are not the solution. A debt crisis is not solved by creating more debt in other places. Allowing Greece to default on its debt is the only way the rest of Europe can move forward.

While the global financial markets may have temporarily embraced news of a Greek debt plan before crashing back to earth last week on news of the since-abandoned referendum, investors should remain cautious. Stocks rallied on news that the risk overhang from Greece is now in the rear-view mirror. But just like a one-week bachelor party bender in Las Vegas, it takes more than a day to recover from the hangover.

Be cautious… I’m willing to bet we hear more about problems in Greece and EU countries in the not-so-distant future.

Published by Wyatt Investment Research at