Imagine your are a family of seven brothers and sisters. You’re all married out of the house and living lives on your own.

You are financially conservative but your brothers and sisters all to more or less a degree, think only of today and have steadily over a period of 20 years or more built up debt as their spending always somehow turns out to be more than their income.

As this has been happening you have, at family gatherings, warned them to be more conservative with their finances and to save more. This has fallen on deaf as they have continued their spendthrift ways.

They all enjoyed their lifestyle more than the need to bring their finances in order by reducing debt, never mind even to start saving.

One day due to factors beyond everybody’s control the economy went into a severe economic recession.

Luckily everybody in your family still has their jobs but because banks are becoming more conservative and employment is rising they are reviewing their credit arrangements and some of the members and your family have gotten letters saying that they have to pay back some of their credit card debt is well some of their revolving credit facilities.

Needless to say everybody is very stressed, working feverishly on plans to lower expenses, but for some, the ones that have built up the most debt, the situation looks exceedingly grim.

Late one night around 10 p.m. you receive a call from your brother, the one that’s been the most spendthrift during all this time, sounding very distressed. He explains his financial situation and at the end says that you’ve got to help him because if you don’t his only alternative is to declare bankruptcy.

In the conversation your brother mentions that this whole situation is not of his doing but it’s all because of the banks being unfair. Additionally he says that this whole situation was triggered by the economic recession which he could not have foreseen.

What shocked you most from the conversation was the amount of your brothers’ debt. It was a lot more than any amount he causally mentioned when you tried to convince him to be more financially conservative.

As the situation for him looks exceedingly hopeless and he becomes more distressed he says that you have to help him or if not, you will be responsible for him declaring bankruptcy.

Even though you’ve been conservative with your finances you know that if you help your brother the future of you and your children will be severely impacted. Your children will have to go to a state university and will have to work to pay their tuition and you and your wife will have to give up your dream of owning a little cottage at the coast, something you were planning on buying as soon as the children leave the house.

What do you do?

The situation is not far fetched as this is exactly what is playing out in the European Union at the moment.

You are in the position of Germany and Greece is the brother that phoned late at night.

Greece is trying to put the blame on its financial situation on anybody outside of itself. The normal whipping boys like hedge funds and other speculators are immediately brought into the picture.

While everybody tries to avoid any blame, another Euro 40 billion of previously unknown debt is discovered.

As investors holding Greek debt become more nervous nobody in Greece is addressing the problems and taking concrete action as for example Ireland has done.

In the meantime you are getting calls from other brothers and sisters in the form of Portugal and Spain which is also coming under increased stress from their banks.

But everybody is still spending as if there’s no tomorrow, without any adjustment to their lifestyle.

What are the options going forward?

  • Your indebted brother can declare bankruptcy or Greece can withdraw from the European Union. Take the new Drachma as currency and interest rates and debt servicing costs will go through the roof
  • You can help your brother or Greece can continue asking and get a bailout from the European Union, which will probably only be able to come from Germany as the only economies are not in a position to do so
  • You can, when seeing the possibility of also having to help your two sisters as well leave the family to their own devices or Germany can decide seeing that the situation with Portugal and Spain may be no different to that of Greece in the near future, withdraw from the European Union establishes the new Deutschmark and decides to go it alone in stead of being dragged down with all your spendthrift brothers and sisters

What is most likely to happen?

It will most likely be a muddle through. The European Union on will promise some aid to Greece which will calm the situation somewhat but not enough for Greece to continue going on as it has.

Greece will make some adjustments, not enough to correct the situation but enough to move the problem on to future governments and future generations.

What I don’t understand is the perception that if there is no bailout of Greece it will be bad for the Euro.

Why do European countries have to have similar borrowing costs and similar credit ratings? All the states in the USA do not.

Why can’t a country in the European Union default on its debt? Bondholders surely know that countries have different credit ratings and thus have different probabilities of defaulting on their debt. If an investor wants to hold debt in Greece get a higher interest rate he should also be willing to take the risk of possible default.

You cannot expect to lend Greece money at a higher interest rate and expect Germany, which is more credit worthy and borrows at lower interest rates, to assist Greece if it gets into difficulties.

A major advantage of the European Central bank is that the decision-making process is so dispersed that even if politicians wanted to influence, for example a decision to print money, is difficult for them to do so within a short time frame and the long discussions periods usually leads to nothing happening at all.

That is probably why the European central bank has provided cheap credit to banks through their refinancing operations but they haven’t started printing money by getting into the business of quantitative easing like the US and the UK have done.

I do not think that the Euro will be substantially impacted by the situation in Greece even if Portugal and Spain also comes to the party.

What I really hope does not happen is that Greece is bailed out along with Portugal and Spain by Germany the only country that is really in a position to do so. Not that Germany does not have problems of its own.

Why should you as the only person in your family that has been financially conservative be punished because your brothers and sisters have not been?

What kind of incentive will that create within the European Union?

Spend like there is no tomorrow and you will be bailed out?

It is the same convoluted reasoning which makes people ask for debt forgiveness to the most indebted African countries. Why should the debts of these countries be forgiven and countries that have been conservative and not borrowed so much be punished as their debts are not forgiven?

What do you think every country in Africa thinks now? Borrow as much as possible because only then can you receive debt forgiveness.

Hard as it may be this is not the kind of incentive you want to create in your family. Your children deserve the education you have been saving for the same as you deserve the little cottage at the coast.

Further reading:

Europe needs to show it has a crisis endgame

G7 tries to ease fears over Greek contagion

Greece and the eurozone: Halcyon no more

Spain’s economy

Should Germany bail out Club Med or leave the euro altogether?

Funds flee Greece as Germany warns of “fatal” eurozone crisis

View of the Day: Greece not the only word

ECB begins to turn off the liquidity tap

Greece tests the limit of sovereign debt as it grinds towards slump


Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for information purposes and is not investment advice. Please refer to our disclaimer.

To subscribe to our weekly newsletter and receive a 11 page free report – Enhanced Checklist for Investors, click here | Follow me on Twitter

The Eurosharelab Blog is published by Serendipity Ventures (UG) haftungsbeschraenkt a limited liability company incorporated in Germany. Our address is Von-Eicken-Str. 13A, 22529, Hamburg, Germany. Email: tdutoit@eurosharelab.com