My Big Fat Greek Bailout
Monday, 07/13/15, might now be called
Financial Collapse Postponement Day.
After months of hostility, Greece finally arranged a financial bailout agreement with its European creditors on Monday. The bitter negotiations, which arranged for the bailout, continued nine hours past a Sunday midnight deadline! This is the third time Greece has received such a bailout.
The deal will better secure Greece’s slippery place in the Eurozone and avoid financial collapse of the extremely socialist country. Greece failed to make a
1.5 € billion payment to the International Monetary Fund on June 30. It also needs to make a 4.2 € billion debt payment on July 20. Greece simply does not have the money to make either payment.
So, how does this play in Peoria? Why does this matter to home schooling families in the good ole’ U.S. of A. Well, if the dominos start tumbling in Europe, it won’t be long until they start shaking here. This also is a great example to use when teaching children about money, debt, and finances in general. It's like Econ 101 on streoids.
The Euro, Europe’s single currency, was launched in 1999 as a way for European countries to better compete against the U.S. and others in the global economy and make for easier commerce between Eurozone countries. Greece adopted the Euro in 2001.
Some Eurozone countries, like Germany, France and the UK have fairly solid individual economies. Others, like Italy, Spain and Greece, are on shaky ground. Like swimmers caught in a rip-tide, the strong are afraid that the weak will drown them all.
On January 25, 2015, Greek voters rejected their center-right government which had implemented reforms to bring the country back to good financial health. They elected a radical leftist regime that promised to end the strong financial medicine needed to treat Greece’s economic malignancy.
In its place, the radical left promised to hire back laid-off workers, raise the minimum wage, and expand access to health insurance (sound familiar?).
In short, the left said “If you elect me I promise to keep paying millions in government wages, raise pensions and give other ‘entitlements’ like free electricity.”
The new government was granted a 4-month loan extension by its European creditors.
The financial realities of a bankrupt country hit about 5 months after the elections. Greeks were shocked when, on June 28, 2015, the newly elected leftist regime closed banks without warning and imposed an ATM withdrawal limit of only $67 per day. Foreign financial transfers were also banned. Business in Greece, including locally owned restaurants, groceries and other mom & pop establishments, suddenly stopped cold.
When European creditors demanded financial reforms, the leftist government called for a popular referendum to accept or reject the reforms.
On July 5, 2015, Greek voters overwhelming voted to reject the sound financial measures called for by Greece’s debt holders.
Once again, Greek voters forgot the fact that The Many cannot be supported by The Few. This basic economic truth has slammed the new Greek government to the mat. The citizens, who had foolishly believed they could continue a life built upon a mountain of debt, are now faced with harsher financial realities than they rejected at the ballot box.
A week or so ago, the New York Stock Exchange, and other stock markets around the world, tumbled badly as the prospect of an entire country going bankrupt looked as if it would actually happen. All of the financial gains made by the stock market in 2015 were erased in one rollercoaster week. Investors should take note; many markets are still very shaky.
Now, after very-last-minute negotiations, Europe has agreed to provide Greece with more loans so that the country can make payments that are due for previous loans. This is like giving another credit card to someone who can’t make the minimum payment on the credit cards they already have. If they don’t make serious changes they will just have more debt they can’t pay back. Your family can’t live that way, nor can a country.
Before the new loans, Greece owed some 320 € billion, equaling about 180% of its entire annual Gross Domestic Product (GDP). That means it already owed the monetary value of all the finished goods and services produced in Greece for two years. The harsh reality of this is that the entire country is owned by other countries, two times over.
Before Greece can get the proposed $95 billion (85 € billion) bailout, reopen its banks, make government payroll and get business rolling again, the government will have to pass financial reforms that are more austere than the Greeks could have imagined just a few weeks ago; And, they will likely accept them gladly, just to get the banks open. Funny how little things like closed banks and virtually no cash can change people’s minds.
The radical leftist regime will need to raise taxes, reduce pensions and reform the union-controlled labor market; actions not usually taken by socialists and leftists. In the next few weeks, Greece will be forced to allow competition in industries, such as energy, which has long been protected, and begin weaning its people off of the entitlements they have grown to expect.
While in the U.S. some demand a higher minimum wage, in Greece, they may just demand a lower minimum wage so they can work and get paid.
At his point, Greek banks are still closed and won’t reopen until the European Central Bank decides to increase emergency credit to Greek banks. The new loans give Greece one last chance to prove it can make the changes that are needed.
"Trust needs to be rebuilt," said German Chancellor Angela Merkel, adding, "Greece has a chance to return to the path of growth."
"The Greeks have to show they're credible, show that they mean it," said Jeroen Dijsselbloem, president of the Eurozone finance ministers.
In a first step toward getting its bailout loans, the Greek government has to pass a set of measures into law by Wednesday, July 15, 2015. If it does not, the U.S.stock market rollercoaster ride will likely take off again.
Then of course, there is the Chinese stock market, but that is for another day.
Get your financial house in order. Teach your kids sound financial principles. Read: Power Tools To Slay The MONEY DRAGON, today.