Greek Crisis - Breakdown Of Situation

In this video, Mike Maloney talks about Greek Crisis in a detailed way. He also explains the graphical statistics and representation as to why Greek debt become burden.


Hi, I just wanted to talk about Greece a little bit because so many people are asking about Greece and what's happening there. They want to know about the bank runs, the bailouts, the potential for bail ins, political consequences, the potential for civil unrest and most of all, could it happen here or in other countries.

First, I want to say how grateful for technology that I am. Right now, my Director-Producer Dan Rubach is on vacation in Thailand and I'm sitting in Los Angeles, California at my home and so he's halfway around the world recording this and he's going to be posting it on YouTube shortly. And so I'm just so grateful to live in this modern world where things like this can be accomplished so easily.

First I want to talk about the euro. Back in 2005 when I was writing my book, Rich Dad's Guide to Investing in Gold and Silver, I stumbled across the CIA Factbook while I was doing my research. And it is an absolute wealth of information. But they have a section in there about the Euro and in it they said that the Euro won't last. And so I started investigating this stuff for myself and in presentations since 2009 I've been saying that the Euro is doomed. And here's why.

The eurozone it's now 19 countries sharing one currency and one central bank. But they're all able to issue their own levels of debt. They all issue their own bonds and this can't possibly work because it rewards recklessness and it punishes prudence. In chart one here, you can see the level of Greek public debt is almost up to 180% of their GDP. So the size of their economy, the amount that they owe is 1.8 times greater than the size of their economy than annual GDP. Now they've been able to live beyond their means for quite a while because they've been able to issue all of this debt and part of the reason that their debt to GDP ratio exploded though is because their GDP has contracted. Their economy has slowed down and when the GDP contracts even if you don't take on new debt the ratio of the debt burden becomes that much greater.

So that's a portion of the reason why. But the biggest reason why is politicians, because they're allowed to -- the country is allowed to sell their own bonds even though they're using the Euro as currency. They sell these bonds and they run the deficits off of it so politicians can promise a free lunch. They promised everybody free stuff. They do a bunch of deficit spending. They sell bonds denominated in Euros to cover it but it's Greek debt. It's not the ECB's debt.

Now the ECB buys some of this debt and when they do Euros are created and that dilutes the purchasing power of all Euros including the Euros that are in countries such as Estonia which only runs a 5% debt to GDP. So they're very prudent and responsible. The Greek government has been in shambles for a long, long time. That's been mismanaged for decades and today they have to pay the piper. The debt is coming due basically.

But you can't have all these different countries sharing one currency and one central bank but and then allowed to issue their own levels of debt. It just cannot possibly work. So, now if you recall this all got fixed back in 2011 and 2012. I don't even know if you remember but there was a first round of bailouts back then. Now Greece had officially pledged that it would not default or restructure any of its debts and then right after it said that it filed the biggest sovereign debt default in history and private investors in Greek bonds had to take a 53% haircut.

Now countries holding Greek bonds and the big banks didn't have to take the 53% haircut. Anyway what they still had to do was exchange the bonds that they were currently holding for new bonds that were 53.3% less valuable and they paid lower interest rates. So the total losses could add up to as much as 75% for some investors.

Now the ECB and IMF bailout was a 110 billion and then it was followed shortly thereafter with another 130 billion. And the Greek bond default then caused the Cyprus financial crisis. Because there were Greek bonds in some of those Cyprus banks and so those banks became insolvent and they closed for a week and declared a bank holiday. The IMF and the ECB arranged a 10-billion-dollar bailout if the banks did a bail in. So the banks were required to take some of their depositors' funds in order to be able to receive the 10 billion dollar bailout from the IMF and the ECB.

Now I just find it interesting, the first Greek crisis, the repercussions, the echoes, the shock waves that go around the world caused the Greek default. I mean, I'm sorry, caused the Cyprus crisis and which caused a bank holiday in Cyprus and lately the banking crisis in Greece that developed caused bank runs. Just like in Cyprus they were having bank runs. And they needed another bailout but the austerity measures were just too much for them to agree to and on Sunday, June 28th, Greece announced their own bank holiday and depositors since then can only get $60 per day out of the ATM's. I'm sorry 60 euros. It's about $66.

And so I read something recently I'm just paraphrasing. Nick Giambruno from Doug Casey's International Man, he had a very nice article. I needed to shorten it up here and so I've rearranged it, moved some of the paragraphs around and made it much shorter. But it goes like this:

"For the unprepared, it happens like a mugging. When you hear a central banker or a politician deny that something is going to happen, you can be almost certain that it will and probably soon. Coming from a government official, the real meaning of no, absolutely not, is well, it could be tomorrow. The reason for this dishonesty is that government needs to take the public by surprise. Otherwise, they won't get the results they want. For the past month, Greece's government has been denying that it intends to impose capital controls and on Sunday, June 28th the Greek finance ministry repeated the denial yet again.

Then on that same day, just a few hours later, a week-long bank holiday was declared and they would impose the capital controls after all. But don't worry, the Greek Prime Minister promised, your deposits are completely safe. The term bank holiday is a politician's euphemism. When one happens, you won't be celebrating, you'll be very worried. You won't be able to access your bank account. How will you get by? How long will the lockout last? And when it ends, will your money still be there? Will any of it remain? Bank holidays and capital controls are all about maximizing the amount of money available for the government to confiscate. Pen up the sheep and they are easier to shear. Once the banks are closed or on holiday, the politicians are free to help themselves to as much of your deposits as they want. It's like an all you can steal buffet. Calling the experience a holiday is like calling a street mugging a surprise party."

So now I'm going to move on to chart two and show you just how inept these government agencies all are. These are the IMF projections for the Greek's public debt. So it's their debt to GDP again, how much they owe to the size of their economy. And you can see that their actual is up near 180%. Well, in March of 2012, they made a projection that -- there's the grey line that starts right underneath the word actual and descends, and the austerity measures that they had to agree to were supposed to get Greece's government spending under control to bring the dead burden down to under 120% of GDP by 2020.

And then in June of 2014, they basically go oh! we were wrong. Now the projections are that you'll be able to make it down to that 120% level by 2022. And then one year later June of 2015, they say, well, we were wrong again. So each time they think that this new projection that they've come out with is the right one and this is going to work and this is just like following the US government's annual consolidated financial statement of the United States and the Congress's projection of the debt into the future. And it always looks like it's going to go down as the way their projections are but it always ends up going up.

Next, I want to go to chart three. And this one is dealing with a country's ability to pay off its debt. And whether you're an individual or a country, the ability that you have to pay back a loan is totally dependent on your debt to income ratio. It's how much you've got to pay each month compared to how much you're making each month. It's that simple. Unless like the United States, you're legally permitted to counterfeit the currency as the loan is denominated in. Then you can just print it up and pay it back, but for most your income has to be far greater than the amount of debt service that you've got each month on the debts.

And if you look at this chart you can see that Greece has about seven times the amount of debt that then they have of annual tax revenues. But the United States has about nine times, so does Spain and Japan has almost 20 times the amount of debt they have of annual income to pay that debt. The other countries that are in trouble Portugal, Italy and Ireland are down at six and a half and six times the debt. So Greece's debt is very large and completely unmanageable for them but the United States, Spain and Japan should actually be in worse shape and we have a day of reckoning coming sometime or another.

Now, Greece just held a referendum and so I'm going to go on to chart four and they voted on whether or not to accept the new round of bailouts along with austerity terms, more austerity measures. And by an overwhelming majority the Greek people voted to tell the IMF and the ECB to just go and take a hike. They voted no by an overwhelming majority.

Now earlier the Finance minister had said that if there was a no vote that the Greek banks would be opening on Tuesday. Well, he just resigned. So we'll see how that plays out. So he said that that he's no longer responsible if it doesn't happen.

Now I'm just going to go to chart five and this is just a chart of base currency in the eurozone. So base currency is the currency that's in circulation, the paper euros that exists and the coinage that's in circulation plus reserves that the commercial banks in all of the eurozone countries have in their accounts that are held at the ECB, the European Central Bank. But all of those accounts can be redeemed in paper Euros. So basically, it's really, whenever you're measuring the monetary base or base currency it's the measurement of the paper currency in that country.

And what you see here is that they've been incredible inflators. They've inflated by -- there's three and a half times more base Euros in existence than there was in the year 2002. So this is mind boggling inflation happening. But one of the things that's very obvious is it looks like they sort of had some semblance of control over the situation until 2008. And then everything appears to be going out of control. And you can see all the Euros that were created during the Greek bailouts right at the beginning of 2012, there the big rise. So the whole eurozone is in trouble because of this. Because it's a common currency. So it affects every country that's part of it.

What will happen with the banks on Tuesday? Will they reopen? What's going to happen with Greece? Basically, it doesn't matter that much because there are no good choices and there is no way out for them. So what is the best thing they could do? Well, I'm pretty sure that it would be to let the free market rein. It's the best thing they could do for themselves is simple. The problem is it's the thing that they won't do. It would be to endure, to choose to endure the worst short-term pain for the best long-term gain. To let the free market rein and to let everything just fall apart. For government to step out of the way and let the people pick up the pieces. And it would be horrific for a few years, just horrible. They really need to say screw the Euro and use gold or Bitcoin or anything else that the free market chooses. But eventually the sun will shine again and they will then start enjoying maximum prosperity.

But that's not what they're going to do. They're going to choose to have the government do something about it again. They're going to go back to these talks with the IMF and the ECB and something will be done about it. I don't know if Greece is going to end up leaving the EU and if it does it'll come out with its own currency. But you can bet the government is going to try and do everything and manage everything. And if they don't do that, it's going to be the ECB and the IMF along with the Greek government trying to do everything and manage everything. And they are going to pay for that for decades to come. It will be haunting them. They will have slow economies and they're going to have this huge debt burden.

We live in this crazy world where no one is able to pay their own way, where everyone borrows from their future pay so they can spend it today. But they all must pay the piper someday and for Greece that day is today. So can this happen here? Absolutely, yes. There's no country on earth that is completely immune from reckless deficit spending that persists decade after decade. We are coming to the end of a 100-year-old credit, this credit cycle, this debt cycle that we're in will eventually get washed out. What you're seeing is that the levels of the debt it used to be that you took on some debt and there would be economic growth from taking on that debt that would help pay off the debt. But the more debt you have compared to the size of your economy, the more it slows and impedes that growth.

And we're getting to the point where we receive very little, if any, benefit from taking on new debt these days. I'm going to quote a guy named James Corbett. He says the current financial system is founded not in the bedrock of sound economic principles but instead upon the quicksand of public perception. And this is so right. When people get scared bank runs happen, civil unrest can happen and then you have all of these economists and Secretaries of the Treasury and stuff all trying to cobble up some new world monetary system.

For many, many years now, I've been saying that every 30 to 40 years the world has a new monetary system and we've been tracking what I call the cracks in the system or the nails in the coffin of the US dollar standard. The problems that the Euro is having right now is just some of the symptoms of the world about to go a giant change in monetary systems and there will probably be just like the General Conference of 1922, the Bretton Woods Agreement Conferences in 1944 and the Washington Accord in or the Smithsonian Agreement, I'm sorry, in 1971.

There's going to be an emergency meeting of the G20 Finance Ministers or something like that to cobble together a new world monetary system. And it's probably going to happen before the end of this decade. For a long time, I've been saying that this is going to unfold very, very slowly until the day that it doesn't. And then it's going to happen very fast. And what you're seeing now with the crises around the world is things are speeding up and every week now there is a new nail in the death of the global financial system that currently exists. And this is all going to cause tremendous financial upheaval that is actually the greatest opportunity of your lifetime.

It's when there is turmoil that financial gains can actually be made in the shortest period of time. But you have to be ahead of the curve and know what's happening out there. Now everything that is happening in Greece has affected the gold price and it's not in the way most people would think and there are reasons for that. And so in an upcoming video we're going to be looking at how this is impacting the precious metals markets and why gold and silver are doing what they're doing in the face of all this chaos. So subscribe to our YouTube channel if you could and subscribe to the newsletter. You'll get the updates that I'm talking about on the gold market and until then well, see you next time. Thank you.

Written by Mike Maloney on July 6, 2015.