The news over the last few months continues to focus on Europe and what will be necessary to take care of Greece. Unfortunately, Greece did not have a bright future before the European Union challenges are considered. Since its formation in the 1820’s, modern Greece has been supported by three pillars. First, given its location, Greece has leveraged itself by allowing external powers a means to battle other countries in their neighborhood. In the 1800’s, the United Kingdom used Greece as a military foil against the Turks. Later, the U.S. used Greece’s strategic location against the Soviet Union and like England before it, injected huge amounts of capital into Greece without any expectancy of payback. In the post Cold War world, neither Turkey nor the Soviet Union are the same threats, so the capital that flowed for so many years to the Greeks has dried up. Secondly, Greece’s coastal proximity, allowed it to become a force in shipping. It quickly became one of their leading industries. Unfortunately, in the modern age of super-container ships Greece can no longer compete and most of this industry has moved to Norway, China and Korea. Thirdly, tourism is now Greece’s largest industry, but modern economies can rarely survive on tourism alone. Today those three previous pillars of support no longer exist and therefore Greece can no longer be salvaged.
We believe the path forward for Greece is bleak, unless they discover a new ongoing supply of capital that will never have to be repaid. For Greece to survive, it must be kicked out of the European Union. Before that can happen, independent projections, from private intelligence organizations like Stratfor, estimate the European Union must create a fund of around 2 Trillion Euro to provide the necessary support for the European continent. This number includes the funds needed to prop up the banks left holding the defaulted Greek bonds and also the necessary back stop to support the bond refinancing needs of Portugal, Spain, Italy and Ireland over the ensuing three years. The European Financial Stability Facility (EFSF) is already in place and the likely bailout mechanism Europe will use. The challenge, as always, will be obtaining political support from the other 16 members of the EU to write that sobering check. Some, like Finland, are demanding collateral for any guarantees.
October has seen the financial markets bouncing upward after the big sell off in August and September. We see this rally continuing for the near term until the European challenges with Greece reemerge over the next few months. The Wall Street consensus suggests a recession in the U.S. is only a 25-30% probability. Pacific Wealth Management believes that likelihood is much higher as the world financial markets react to and digest the upcoming Greek bond default. Our investment portfolios remain defensively positioned with wealth preservation our continuing focus.