Global markets were jostled around and settle into gains for the week. The driver this past week was the same as it has been in the past few weeks, and that is the ongoing hope/rumors that Europe is getting its arms around the most immediate problem child – Greece. Recall that not too many days ago it appeared that all the ills in Europe had been pushed down that road with the Greek politicians’ approval of their next bailout. Since the Greek politicians accepted the terms, there have been a ton of rumblings about the actual implementation. In addition, the Greek government bond holders are all starting to question who exactly will be afforded an exemption from losing money on their investment in the Greek bonds. Conveniently, the European Central Bank is trying (and succeeding since they are the rule maker at the moment) to exempt themselves from any losses on Greek bonds they hold.
The stock markets appear to be pricing in whatever financial drama might unfold in Greece, and an assumption that it will be contained. The same thing happened in 2008 when investment house Bear Stearns went down. The market shrugged off the collapse of the investment house but did not realize the true impact of the event until much later. My fear is that there will be unforeseen events resulting from complex financial surgery that is currently being conducted on the gravely ill European problems. I think this is a real fear considering who is running the show in Europe – professional politicians. It is very important to remember that the current leader of Greece (the country that birthed democracy), Lucas Papademos, is an unelected technocrat put in place by the European Union. Papademos’ prior position was at, you guessed it, the European Central Bank. He has been very firm that the problems in Greece should not harm the banks that made loans (ones they never should have made) to Greece.
Tale of Two Countries
All of the Greek drama being dragged back on to the global stage still makes me wonder where Greece would/could be if they followed Iceland’s approach to their debt problems. Recall that Iceland’s banks had taken on too much debt and in 2008, like the rest of the world, was thrown into economic turmoil. The key to Iceland’s current strength was summed up very well by the Washington Post:
“Iceland did what the United States chose not to do — allow its biggest banks to fail and force foreign creditors to take a hike. It did what troubled European nations saddled with massive debts and tethered by the Euro cannot do — allow its currency to remain weak causing inflation, but making its exports more desirable and its prices more attractive to tourists.”
Three years later, the unemployment rate in Iceland has fallen, tourism has increased, and the economy is growing. The government successfully raised money from investors in the summer for the first time since the crisis.
The result of Iceland’s actions have been to see the country’s credit ratings increasing, GDP growing, unemployment dropping, and their stock market up 60% in 2011. Greece on the other hand has contracting GDP, increasing unemployment, a declining stock market, and a rock bottom credit rating. Iceland’s road was not easy, and was certainly painful for Icelanders, but they controlled their destiny by not saddling their citizens with the bailout of bad acting banks and other investors.
The recent rumblings and actions in Germany and Greece are starting to look more and more like Greece is going to follow Iceland’s path whether the bankers, politicians, and investors like it or not. Stay tuned.
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John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial planning and investment management firm specializing in helping families and couples who are not yet retired realize their financial goals. For more information, visit https://www.chladekwealth.com.