Reaching economic meltdown, there’re basically two types of business that are still booming in Greece – tourism and flag sales. Tourists are still coming in drove while flag salesmen are doing roaring business, thanks to a pending July 5th referendum to decide if Greece will eventually exit from the euro zone or otherwise.

Greece, the country that introduced “demokratia” or democracy as we know today back in the year 507 B.C., is in financial crisis, for real. For as long as one can remember, global financial markets had been belittling and ignoring Greece’s problem, until today, as can be seen by Dow Jones, S&P 500 and Nasdaq – all three of which tumble 2%.

 

Actually, there were other financial problems elsewhere, but were dwarfed by news of Greece default on a €1.6 billion (US$1.8 billion; £1.14 billion; RM6.76 billion) bond payment due June 30, which is now 99% about to happen. In China, its central bank cut its benchmark lending rates by 25 basis points to 4.85% on Saturday, the fourth cut since November.

The China government was hoping it could reverse the 20% plunge in its stock market in the last two weeks. Surprisingly, the cut didn’t help the stock market, and the Shanghai Composite Index closed down 3.3%. While Greece cannot pay its debt, the governor of Puerto Rico announced the country also cannot pay back more than US$70 billion in debt.

 

Seriously, how bad is the Greece problem? In total, the country owes foreign creditors a whopping €280 billion (US$313 billion; £200 billion; RM1.2 trillion). That’s roughly about the external debt that the Malaysian government is approaching, thanks to Najib administration’s journey in debt accumulation.

Obviously, Greece doesn’t have the cash to make the interest payment due this week (Tuesday). Greece’s talks with creditors failed abruptly over the weekend, and its government shut down the financial system for six days to stop a run on the banks. ATM withdrawals capped at €60 a day, causing massive long queues.

 

Almost every single Greek thought an eleventh-hour solution would be reached, but it didn’t, hence the panic and chaos. Apparently, the Greeks pride got the better of its debt, when Prime Minister Alexis Tsipras rejected bailout offer, which he has dismissed as a “humiliation” for Greece.

Apparently, an €18 billion package designed to bailout and refinance some of Greece’s debt involves a combination of spending cuts and tax increases. However, Greece is already taxing its highest tax rate of 42% on its citizens who earn as low as €42,000 annually.  In addition, the nation has a value-added tax (VAT) of as high as 23%.

 

Greece’s Social Security taxes are also much higher than in the U.S., not to mention problems collecting taxes it is owed. Here’s the worst part – the nation has an unemployment rate of 25.6%. But to be fair, the Greeks cannot expect continuous bailout money being pumped from other wealthy European Union nations either.

Fortunately, Greece represents less than 2% of the European Union’s GDP. Hence, a default or even an eventual exit of Greece from EU won’t hurt too much. Sure, it would probably cause some panic selling here and there, but will eventually return back to business as usual.

 

Perhaps the Greeks pride could be the only solution to the economic crisis. Mr Tsipras’s decision to call a referendum and a possible euro exit would mean reverting its currency to Drachma. Yay!! the Greeks can get back their original currency. Kaboom!! the Greeks may see their currency value plunge by 40% against the dollar, weakening their purchasing power.

Either way, they will lose their beloved pensions money. So, here’s the deal to the Greeks. Take the bailout deal and lose part of pensions; or leave euro but retain pensions and let the government issues tons of worthless Drachma and prepare for a loaf of bread that costs $1,000,000 Drachma, cheekily speaking.

 

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June 30th, 2015 by financetwitter

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