The country of Greece has produced some astounding mathematicians, scientists, philosophers, and other intellectuals in its long history, but managing finances does not appear to be a strong point for this country. After blowing through over $130 million in emergency funding, the country continues to struggle to pay its debt payments.
My economic analysis is straightforward. Could you imagine, borrowing just to make payments on another loan? Eventually, if this pattern continues, a person could find themselves in bankruptcy. And this is what has happened to Greece. Facing mounds of debt and an inability to recover from the recent economic hardship, the country is on life support in the form of emergency capital.
The problem is that you cannot disconnect the life support, as it would threaten the rest of Europe and the world. The European Union (EU) realizes this, which is why it must deliver more funding.
Hopes for a resolution in Greece are hitting a snag after a compromise on the second round of financing failed. Europe—namely Germany and France (the top lenders)—wants to see a plan of increased austerity measures in Greece, including tax increases and spending cuts, before another euro is advanced. Greece is also looking to sell off some of its state-owned companies.
Greece is looking at additional EU/International Monetary Fund loans of 50 to 60 billion euros (US$71.75 billion to US$86.09 billion) to help with operating the country in 2012 and 2013.
The funds will be advanced sometime in July in order to avoid a default in Greece. But, as I have said, a resolution in Greece does not mean that Europe is home-free, as the situation in Greece may be foreshadowing things to come. There are also debt and growth issues in Portugal, Ireland and Spain. Moody’s reported that it may cut the government bond ratings in Italy.
The reality is that, without renewal in Europe and other foreign markets, we cannot expect a sustainable recovery.
On the west coast of Europe, watch for Portugal. The country is paying out an enormous 7.9% on its 10-year bond, which cannot be good; yet this high rate is required to attract investors due to the high risk of holding Portuguese bonds. The problem is that Portugal is broke and cannot continue to pay out high-yielding bonds. The country will need to reorganize its financial structure and try to renew its economy and finances. Standard & Poor’s cut its view on the country’s five biggest banks.
While Portugal is not a significant player in the European Union, weakness there could impact other countries, including neighbor Spain, which also needs to raise more capital. The problem is that Spain is a major global player, with its economy being the ninth largest in the world.
The problem is that the big countries such as Germany and France are supporting the weaker members, who cannot survive on their own at this time without capital infusion. This is not good and it will hamper growth in Europe. The trillion-dollar austerity measures will take away from investing in the country’s growth and economic renewal.
I feel that Europe may continue to underperform the global markets in 2011 and 2012.