My Big Fat Greek Analogy

Will the EU and the world dodge a financial bullet by kicking the can down the road for a 3rd time in Greece?

An infusion of money by the EU into Greece that will be combined with promises of additional austerity measures, increased taxes and slashed pensions, may stave off the inevitable sovereign debt default and eurozone exit of that country for another period of time.

But it is extremely likely, however, that the ‘crisis in Greece’ will resurface again at some point in the future.

In addition for a country that’s currently in recession/depression, the measures described above forming the basis for a deal will do nothing to improve the economic situation in Grecce and in fact will likely be detrimental to both the economy and the people.

The first two Greece bailouts, and now a likely third, ‘was supposed to buy Greece time to stabilize its finances and quell market fears that the euro union itself could break up. While it has helped, Greece’s economic problems haven’t gone away. The economy has shrunk by a quarter in five years, and unemployment is above 25 percent.

The bailout money mainly goes toward paying off Greece’s international loans, rather than making its way into the economy. And the government still has a staggering debt load that it cannot begin to pay down unless a recovery takes hold.

Many economists, and many Greeks, blame the austerity measures for much of the country’s continuing problems…‘ (Source)

A vicious cycle if ever there was one.

Greece analogy from the mortgage world!

Imagine that a bank lends money to a homebuyer purchasing a $20MM estate who has little income, no savings, a part-time job, an extravagant lifestyle funded by credit cards and who also supports his extended family (sounds like a pre-2008 sub-prime loan actually).

Predictably, soon after the purchase is completed, the homeowner becomes unable to make his mortgage payments. Given this the bank, unwilling or unable to have the loan go bad, floats an unsecured loan that will allow the homeowner to stay afloat for a period of time.

Also predictably, when that period of time is up and the homeowner can no longer make payments, the bank has an even larger problem facing a default on both the original mortgage and the unsecured bridge loan that was designed to give the homeowner the time to ‘get well’.

With limited choices for both parties and the promise made by the homeowner to get a better job, stop the excessive spending and reduce or completely cut the support of his extended family members, the bank bites the bullet and floats another bridge loan.

Once again when that money runs out, the homeowner can no longer pay and the bank has more hard choices to make.

Do they continue the farce while loading up the balance sheet with more worthless paper or do they make the difficult decision to write-off the debt and cut the homeowner loose to fend for himself?

Using this simplistic analogy to describe the current crisis in Europe, this is where the EU and Greece currently find themselves!

Between a rock and a hard place facing a lose-lose crisis for all of those involved!

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Article author Michael Haltman is the President of Hallmark Abstract Service in New York.

HAS is a provider of title insurance in New York State for residential and commercial real estate transactions.