We’ve all seen or heard the media reports about the possibility of countries defaulting on their loans.  Most recently the U.S. has come under fire about their obligations and ability to pay.  Rating agencies are threatening to downgrade the U.S., which would have dire consequences for the US economy.  Frankly, I don’t believe that will ever happen.  The threat of a downgrade was intended to be exactly that, a threat.  In other words, this was a public shot at the U.S. government, an attempt to exert public pressure for the U.S. to get their act together.

Where this is real and happening today is in Greece.  So what happens if Greece doesn’t pay?  Do they file for bankruptcy? Does that mean their bankruptcy will appear on their countries credit bureau report for the next 7 years?  Does it mean that no one in Greece will be able to get a mortgage until their country has been discharged for 2 years?  I ask these questions with tongue firmly planted in cheek.  The answer is that the countries debt doesn’t go away.  It means that Greece has not met its financial obligation for that particular month.  The creditors will demand payment, but unlike consumer debt there’s nothing to repossess.  It’s not as if the lenders can foreclose on Athens.

The reality is that the Greek currency will go into the toilet because they’ll be printing money like mad.  They may opt out of the Euro currency for some period, possibly two years, and go back to the Drachma, Greece’s currency prior to entering the EU.  This will lead to hyperinflation, and there will be zero demand for their currency or more importantly trust in their currency.  This reminds me of the 80′s when I visited countries in the Balkans.  I would go into the bank, exchange $100 Canadian for the local currency, and I would need a wheelbarrow to carry my cash around.  A devalued currency will mean that all imports will be extremely expensive, and this will have a direct effect on the standard of living in Greece.  Then there’s the obvious, borrowing in the future may become next to impossible for Greece.  To be clear this isn’t just Greece’s problem, there’s concern for Spain, Ireland and Portugal as well.  They may be next.

Back to the U.S. – One of the funniest solutions I have heard recently about their debt came from comedian Dennis Miller.  On his most recent HBO special he talked about the US debt.  He said, and I’m paraphrasing, “I don’t understand this debt issue.  The numbers are way above my head.  But if I was in the White House I would say bleep’em, we’re not paying.  We got nukes”.

Until next time,

Cheers