Why Greece Can't Default Just Yet

Greece has been on the verge of defaulting on its debt for more than a year.  Each time the crisis looms its ugly head, European leaders, led by Germany's Chancellor Angela Merkel, come through with another temporary bailout plan that enables the Greeks to survive a little while longer.  But the decision makers about the Greek crisis have to know that Greece at some point is going to default.  So why throw good money after bad with one more bailout? 

The reason is simple: the European market needs to have all its ducks in a row before it allows Greece to default.  If Greece were to default before they are ready, it could potentially have catastrophic financial consequences in Europe and in time to the rest of the world economy.  So while we watch the news showing the Europeans confidently handling the latest debt crisis, behind the scenes they are working as quickly as they can to make the necessary preparations for the eventual default.  It's like watching a duck traveling through water.  Above the surface it looks effortless but below the surface the duck is paddling furiously.  That's what's going on with the European leaders right now.  They are trying to put a "happy face" out to the public to reassure us that they have the crisis under control, but behind the scenes they are all wringing their hands making the hard decisions needed to weather this financial storm.

So what needs to be done to prepare for this eventual default?  Greece has to be kicked out of the eurozone if the euro is to survive, but for that to happen three things must occur: 1) 400 billion euros are needed to firebreak Greece off from the rest of the eurozone; 2) 800 billion euros are needed in order to prevent a wide-scale banking meltdown, because the day that Greece defaults on its debt, there is likely to be banking collapses in Portugal, Spain and France; and 3) the markets will go wild to say the least.  To avoid Italy being dragged down with Greece, it will need 800 billion euros to keep it solvent for the next three years.  So until the Europeans have two trillion euros in funding available for this crisis, they can't kick Greece out of the eurozone. 

So how does this affect commercial real estate in the Pacific Northwest?  For one, interest rates should remain low.  The Europeans will continue to pour their equity into U.S. treasuries (a flight to quality) which will keep treasury rates low.  Secondly, we are fortunate that our trading partners are situated along the Pacific rim.  Most of our exports are shipped to Canada, China, Japan, South Korea and other Asian nations.  If our export volume remains steady the Pacific Northwest should weather this storm without serious consequences.  I am not as bullish about our east coast which trades heavily with Europe.  I believe the Greek crisis will result in slower economic growth in Europe (likely prolonging the European recession) which will have an adverse impact on their buying U.S. exports.  This will eventually affect us on the west coast but not nearly as much as those states who trade significant volumes with Europe.  I still believe that commercial real estate in the Pacific Northwest is a sound long-term investment, and though it may sound like it, I'm not trying to put my own version of a "happy face" on the impact to us of the mounting crisis in Europe.  Stay positive, the world is not coming to an end, we'll get through this. 

Source: Portfolio: Preparing for Greece's Failure, STRATFOR, Peter Zeihan, September 29, 2011.