’m sure you’ve all heard in the news, there is a very real possibility that Greece will default. And then there is Italy and Spain — and who knows who else.
To avoid this, authorities are working hard to come up with a solution to the crisis. Or more accurately, a bailout.
German taxpayers, of course, are not enamoured with the idea of footing the bill. But at the same time, Greek taxpayers (assuming there actually are any), aren’t crazy over the austerity measures being imposed on them as a condition of the bailout money.
Which begs the question: why don’t they just default?
Simple answer: Greece defaulting is not the major problem. You see, it isn’t really the Greeks who are being bailed out. It is the German, French, and other European banks who have loaded up on Greek bonds. The real danger is that a Greek default could result in a banking crisis.
One wonders why bankers would buy Greek bonds in the first place. But when you think about it, why not? Investments such as government bonds, subprime mortgages, etc. typically are rubber-stamped by credit agencies and pay better than average rates. And really, how much risk is there when even if things do go wrong governments are there to provide bailouts.
If you listen to the experts, for the most part they agree that a bailout is necessary. They understand the consequences of moral hazard, but at the same time, the consequences of not bailing out the banks at this point are much greater.
But are they? The consequences of moral hazard are that this sort of thing will keep happening — over and over again, with the potential consequences getting greater and greater each time the can is kicked a little further down the road. Maybe it would be better to let these banks go bankrupt and deal with that problem as best we can. At least that way we would be sending a clear message to other banks that from now on they might actually be held accountable for their actions.
But then that would require bold action by our politicians, which comes right back to moral hazard. Short-term pain for long-term gain is not a great recipe for getting re-elected.
How does one invest in such a crazy world? Join us on September 28th at the Parksville Community and Conference Centre and learn what is working for us. Please call 250-594-1100 or email firstname.lastname@example.org to register.
Jim Grant, CFP (Certified Financial Planner) is a Financial Advisor with Raymond James Ltd (RJL). This article is for information only. Securities are offered through Raymond James Ltd., member Canadian Investor Protection Fund. Insurance and estate planning offered through Raymond James Financial Planning Ltd., not member Canadian Investor Protection Fund.
The views expressed are those of the author, Jim Grant, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. The information contained in this article was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.
For more information feel free to call Jim at 250-594-1100, or email at email@example.com. and/or visit www.jimgrant.ca