Seller Considerations – Another Great Greek Tragedy

One of the most potentially explosive issues facing the economic recovery during 2012, will be the success of economic recovery in Europe. That success depends heavily on what happens with Greece and its economy. It’s becoming more and more likely that Greece will default on its debt and be forced to leave the euro-zone.

Here’s the present situation. Greece desperately needs another $130 billion Euros in rescue funds to avoid loan default.  The money must come from  The “Troika” made up of the International Monetary Fund, European Central Bank and the European Commission, which has prescribed an Austerity Package that would ensure a decade of pain for the Greek Economy.  Austerity can be described as a “policy of deficit reduction, lower spending, and a reduction in the amount of benefits and public services provided.”  

Greece has two choices. First, it could default on its debt, leave the EU, reissue the drachma, devalue it and try to stimulate immediate economic growth. Portugal, Spain, Italy, and Ireland are also having economic difficulties. If Greece defaults, the risk of other EU countries defaulting becomes much greater and the cost for each of these countries to fund their debt becomes much more expensive.

The second choice is to stay in the EU,  accept the austerity measures, and suffer a decade of economic pain. Most economists see the second round of bail-outs as nothing more than a stop-gap measure which does nothing to get Greece’s economy going again, so accepting the terms does nothing to ensure future success.

Euro-zone finance ministers representing the Troika met last week and agreed to a plan which would allow Greece to obtain additional funds to stay afloat which would also require investors to take a 70% loss on Greek debt. In order for Greece to get the funds, they needed to deepen spending cuts, increase taxes, and exercise greater budget discipline. These measures would have a short-term adverse impact on a Greek economy which already suffers from an unemployment rate of over 20%.

Why should seller’s be concerned about what happens to Greece? Because according to the Commerce Department, nearly 15% of the U.S. GDP is tied to the European economy. If Greece defaults, Europe could suffer recessionary consequences which would have a significant impact on the U.S. economic recovery and on housing prices that have recently showed some signs of stabilizing. It’s not likely the U.S. can absorb a struggling housing industry and another European recession. Greece has until this Wednesday, to approve of the austerity measures, so it won’t take long before we know what happens next.