Johnson: Greek Issues Likely Contained
The transformation of the Greek debt crisis from a banking to a political problem limits the potential impact of a Greek default on the rest of the world, says Morningstar’s Bob Johnson.
The transformation of the Greek debt crisis from a banking to a political problem limits the potential impact of a Greek default on the rest of the world, says Morningstar’s Bob Johnson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The market's attention has turned yet again to Greece. I'm here with Bob Johnson--he is our director of economic analysis--to put the crisis there in context and [discuss] what impact it could have on U.S.-based investors.
Bob, thanks for joining me.
Bob Johnson: It's great to be here today.
Glaser: So, let's do a little bit of background on what's happening in Greece now. Why is this all of a sudden in focus again? Is it just the elections?
Johnson: Certainly, the elections and the threat of undoing some of the austerity measures brought the issue to a head, but there are other things as well. The last tranche of their bailout from 2010 is due at the end of February, and they have to comply with the various measures by the end of that time to release that last tranche. And then if they don't get that tranche, then the bonds they roll off over the spring and summer months, they won't have the money to redo those.
Glaser: So, can you put Greece in context for us about how large it is to the global economy, to the European economy--just how important is it?
Johnson: It is absolutely tiny. It is a flyspeck. It's certainly smaller than many [U.S. states], and really we are talking about maybe $350 billion of total debt here. Keep in mind that the debt of the United States is about $17 trillion. So, it's clearly a huge number--the United States relative to what the Greeks have--and certainly, it's not enough to really wreck the financial system, in my opinion.
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Glaser: It's not a big number, but it's large relative to the size of the Greek economy. Is there really any hope that they could actually repay this debt?
Johnson: That's a pretty controversial issue right now, and that's where there is so much disagreement. One way to look at it is to say, "Well, what is the debt as a percentage of GDP?" And it's about 175%, which is a pretty outrageous number. It's far more than, say, Italy, which is in [the 120% range]. France and Spain are right at the GDP-equals-the-debt level. So, clearly, it's a real outlier in terms of the number, and it kind of [begs the question of how they can] repay that.
On the other hand, what some of the Europeans are saying is, "Well, we have made some of this debt go out over 30 years, and we brought the interest rate down to ridiculously low numbers so that interest payments, as a percentage of GDP, are actually lower than somebody like a Portugal, Italy, and other countries." And right now, I think Portugal is kind of close to 5% in terms of interest payments [as a percentage of] GDP, and I think right now in Greece it's about 2.6%. So, those people argue that it isn't a big deal.
Personally, I think it's a very big number and that just by extending the terms out further and reducing the rates, it's the same issue that we had here in the United States with our homebuyers. Until we started allowing more short sales and until we dispensed with some of the debt that was out there, we didn't really clear up our housing problem. So, I think you just can't do it by extending terms and reducing rates. People just don't live with that over their head for 20 years.
Glaser: The tenor of the conversation now seems to be very different than it was in 2010--
Johnson: Absolutely, yes. And the reason is because, this time around, it's a political question. The last time around, it was a banking question. Last time, when this $300 billion of debt was out there floating around, we didn't know who held that debt--was it a large bank, was it several large banks, who actually was holding the bag on that debt? Well, in the 2010 bailout, that money got shifted to the IMF, the ECB, and various governments. In fact, the German government hold $60 billion of debt. I think the French hold about $40 billion of that $300 billion of debt. So, now, it's in individual countries. But it's not on a bank's balance sheet. It's not going to destroy Deutsche Bank or any of the other large European banks, which was the fear in 2010.
Glaser: So, would you say the chance of there being contagion--that if there were to be a Greek default, that all of a sudden Italy and Spain and Portugal and Ireland are in trouble--do you think that's just not going to be the case this time?
Johnson: Well, I think that's certainly with the Germans are arguing--that if we grant them special terms, [the other countries will] all say, "Well, we want the same special terms." And I think Ireland and Portugal are kind of rumored to be the next two that would ask to get whatever special treatment [Greece received]. But I really think it's not as big of an issue as people make it out to be. I think there are a lot of benefits to being in the currency zone, and I don't really think that any of them want to go out of it. And I don't think any of them can demand quite the terms that the Greeks are getting. Their situation is clearly dire.
Glaser: So, if we don't have the banking issues anymore and you're not worried about the eurozone breaking up, if you are a U.S.-based investor, then should you really care about what's going on in Greece, or is it really just more of a political drama?
Johnson: Well, it's more of a political drama because here's the situation--and it may be more intractable than the banking situation. In the banking situation, they default, the bank goes under or whatever. But here, we've got a situation where it's really personalities, and it's very uncomfortable for the Germans in particular to say, "OK, we're basically going to write a $60 billion check with German taxpayer money and hand it over to the Greeks." And of course, that doesn't play very well politically--since they're holding the bag on that $60 billion worth of debt--to say [to German taxpayers] that their tax funds are going to be used to subsidize somebody else. It's a concept very foreign to the Germans. It's not particularly tasteful. And I think that's why this problem has been so hard to fight because they realize that Greeks are going to have a hard time paying it back. On the other hand, they don't want to finance it.
Glaser: But you wouldn't be making any changes like avoiding European stocks or worrying about your asset allocation based on anything that's happening in Greece right now?
Johnson: Absolutely not. I think the value of the currency union is too clear to the other players like Italy and Spain and so forth. I won't be watching for any run to the exits on any of these. And in fact, the euro has come down, which makes everybody more competitive for a while. Some of the German exports were really kind of helping prop up the euro, if you will, and it made it harder for some of the other peripheral countries to sell. But now that the euro has come in, it actually may be good news for some of the peripheral countries.
Glaser: Well, Bob, I certainly appreciate your take on this issue today.
Johnson: Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.
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