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Will the Greek Rescue Agreement Solve Sovereign Debt Problems?


Will the Greek Rescue Agreement Solve Sovereign Debt Problems?

Quite recently, European leaders came to an agreement regarding a plan to rescue Greece. Greece has been struggling for more than a year with sovereign debt issues that just don’t seem to solvable. The Greek parliament passed austerity measures, and the European Union bailed out the Greek government. And yet, all of this was insufficient. So, for the past few months European leaders have been trying to negotiate yet another rescue plan to help Greece remain solvent – and to come up with a plan to keep sovereign debt problems from spreading throughout the 17-nation euro zone.

In the end, Greece will engage in a selective default, in which some of its loans are converted to longer terms or lower interest rates. Private bond holders are part of this agreement, and there will be an expansion of the European stability fund designed to help buy up some of debt of ailing nations. This last measure is meant to help provide some additional support to Ireland and Portugal, two countries that have been experiencing problem.

Initially, the move was seen as positive, as many investors and traders around the world believed that the arrangement would save Greece – and save the euro. (Some think that we are at the beginning of the end for the euro.) However, there are still questions to be answered, and the euro isn’t out of the woods yet. If continued sovereign debt issues are seen in Europe, and if they are added to by a U.S. debt default, the world could see another financial crisis – one that could very well look 2008 look tame.

Banking Losses in Europe

One of the worries is that there will be more banking losses in Europe. This is someone disconcerting, since there are still a few banks that are not passing stress tests set by the European Banking Authority. If these are banks hit hard by sovereign debt rescue agreements, it could be even more problematic. Indeed, there will be banks absorbing the losses associated with the Greek rescue deal. For this deal, Greek banks bear most of the losses, but there are some French and German banks seeing losses as well. And, of course, the concern is that small losses now are meant to ensure that there is room in the future for other banks to step in if the sovereign debt situation worsens in other countries.

Banks in the U.S. are seeing solid profits so far this year, but it is unlikely that many of them could be coerced into accepting some similar agreement in the U.S. (despite the fact that U.S. taxpayers provided them with TARP loans as a rescue). If you are concerned about bank failure in the U.S., you might want to look into the health of your bank, in order to gauge the likelihood of whether or not you will find yourself with an inconvenient bank shutdown on your hands. Even though your money is safe, if your financial institution has FDIC insurance, you might not want to deal with the inconveniences that come with bank shutdowns.

Are Current Measures Enough? Or Are They Just Short-Term Band-aids?

One the things that strikes you when you look at this situation is the fact that Greece has already been “rescued” in the past. It doesn’t appear as though the sovereign debt issues in Europe are under control at all. Worries that the contagion could spread are well-founded. Especially considering that there are already sovereign debt problems in Ireland and Portugal that are being addressed. On top of that, the recent agreement doesn’t really address concerns that surround Spain and Italy. Southern Europe in general appears to be struggling with debt issues, and there is no true solution to the problem.

Of course, the U.S. has its own version of the problem. Leaders continue to wrangle about raising the debt ceiling in order to prevent a default, but if the debt ceiling is raised, we could easily be right back in this position in another few months. If the debt ceiling is raised only a little bit, as it was earlier this year, we are setting up for another budget fight in a another six to eight months – especially if budget cuts and revenue increases can’t be agreed upon.

One thing is clear: Whether in Europe or in the U.S., debt problems need to be addressed head on. It’s time for countries and consumers to change their habits so that we are living within our means. It’s clear that deficit spending is running into its limits, and is probably unsustainable even in the very near future.

What Can You Do?

There are a number of things you can do to protect yourself. Some people are looking into investing in solid companies with good cash assets. There are also those who want their money in safe places, such as FDIC insured savings accounts and CDs – even with the low yields. Others, though, insist that only physical assets are the way to go right now. With so much uncertainty, the allure of commodities – tangible holdings in assets like gold – is strong. After all, if all of this results in a crash by the world’s fiat currencies, hard currencies will become more valuable. In a world where many expect hyperinflation to hold sway, hedging against inflation with physical assets seems like a good idea.

In a more general sense, it’s a good idea to be prepared. Engaging in sound financial practices is likely to help you get through most crises that pop up regarding the global economy. Cultivating alternative incomes streams, building an emergency fund, saving up some emergency supplies (including food storage), and taking other steps to develop better skills and educate yourself, can help you prepare for almost any financial setback the country or the world might go through.

In the end, the best you can do is shore up your own finances as best you can. If real solutions aren’t found for some of these problems, you may need all the preparation you can get.


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