Possibility of Civil War in Greece?

by Mark Alexander

14:25 PM, 19th November 2011
About 9 years ago

Possibility of Civil War in Greece?

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Possibility of Civil War in Greece?

This week I attended an unofficial Bank of England briefing. This article is based on that meeting and informal discussions with other attendees before and after. It is not intended to be representative of any official views of the Bank of England or Property118. These are my personal opinions and perceptions only.

The wealthy in Greece are pulling their money out of their country and investing into the London property market and other none Greek assets. Do you know why and what the potential implications are though?

If we look at the Greek economy from a property investors perspective and apply the ratio of their national debt to GDP then Greece are at around 140% LTV. Their government are having to pay interest rates of over 25%. The interest rate being representative of the the returns their government are offering on long term gilts. Rates over 6% are considered unrealistic by most economists on the basis that economic growth is highly unlikely to exceed 4%. The productivity and growth of the Greek economy is historically very poor.

To draw some comparisons against the above, America is at around 100% LTV (national debt as a % of GDP), Germany is at around 50% and the UK fares reasonably well at 80%. This is evidenced by the UK government only having to offer 2% returns on its 10 year gilts.

Imagine your credit card debt was 140% of your annual income and you were paying 25%+ in interest. That’s the position that Greece is in. So what can they do and who can bail them out?

There are only three groups, these are:-

  • the European Central Bank, but this would impact heavily on the better placed European States such as France and Germany
  • the Chinese, but why would they want to support an unproductive economy with little chance of getting their money back? Wouldn’t that be a bit like lending £100 to a junkie?
  • or the wealthy individuals within the world – you must be joking!

There is no logical financial argument for any of the above to help Greece as their economy shows no signs of becoming productive. Any measures implemented now will be like kicking the can down the road as opposed to picking it up. Or to put it another way, giving a drug addict some money not to burgle your house whilst you are on holiday. Yep, chances are he will be back!

I suspect there will be some sort of bail out, sort of a a sticking plaster, but this will only serve to stave off the problem for a while unless some form of radical rehab is also introduced.

If support isn’t forthcoming, the banks in Greece might be forced to close down. If that were to happen money would have no value. Marshall Law would have to be implemented and rations and bartering would ensue. If this wouldn’t have cause for civil unrest I don’t know what would. It is likely that the population would resort to feral cat behaviour and what lengths will people go to in order to feed and protect their families?

I am renowned for going to Bank of England briefings and asking the speakers, after the events, what I would call “laymans questions”. I ask these questions not just for my own benefit but so that I can explain this stuff to other people like who think like I do.

During the briefing I attended on Thursday night, several countries “LTV” (their ratio of national debt as a percentage of GDP) were discussed. Every country, including China is in debt so I asked the following question ….

“if every country is in debt, who do they owe the money to?”

The answer is that the wealthy have made their money and taken it out of the country. Therefore, the transfer of wealth has flowed out of the country to private individuals. The National debt is then created by the government spending more than it has available, a bit like when people get to the middle of the month and put their purchases on their credit cards with the intention of paying the money back out of future income. The future income of countries is the tax receipts from their population, they may not even be born yet!

Scary stuff isn’t it?

If Greece could suffer this fate which country could be next?

Well the good news for us is that it’s highly unlikely that it would be the UK. Several others would topple before we do, Italy would be amongst the first.

If the UK government were to be forced into a similar position it might not be able to support the unproductive elements of our economy. People who take from the state in the form of benefits are unproductive to the economy. Greece and many other countries have a much bigger problem than the UK in this regard but what’s happening in Greece today must serve as a warning to us all.

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Mark Alexander
Mark and his family have been investing in property since 1989, initially in the Norwich area but more recently across the length and breadth of England. Mark created Property118.com as a social network for landlords with a vision of becoming the UK’s largest online property investor directory.
Mark’s experiences and strategies as a landlord are shared here

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Comments

13:38 PM, 20th November 2011
About 9 years ago

Thanks for a well documented and thought provoking article Mark.

This should serve as a warning to everyone to reduce their debts, particularly their credit cards, as quickly as they can.

11:56 AM, 21st November 2011
About 9 years ago

Some good points but the title of the article is misleading, it is of the "will the sky fall to our heads" stock of headlines... The answer is no, not much of a possibility really.

Also the credit card analogy is not accurate either, the finances of states do not work as credit cards (ignore what Dave and George wants us to believe). Unless as a credit card holder you are allowed to print your own money and set your own interest rates. The LTV model is not accurate either, UK fares better in this crisis because it is allowed to devalue its currency (already devalued around 20% since the crisis, eurocountries can not do this) and also the maturity of their loans averages 13.99 years. Countries that face problems at the moment are countries with debt (this is true and in this case the ...LTV is rather relevant) that needs repayment now or soon. In a financial climate of limited liquidity they are charged high enough rates to make their debt unsustainable ie Italy and Spain at the moment. I can't remember the figure but Spain's ...LTV is much better than UK's I think but look the interest rates that the two countries are asked to pay.

And another opinion on the question of where do the states owe money to: pretty much every developed state had to bail out the banks when the system collapsed. Particularly for UK this added massively to the goverment debt levels due to how big the financial sector is in this country. In a way the banks' debt never disappeared, it was just passed to the goverments and it now weighs heavily on their balance sheets.

It is already well reported that Greek wealth owners have been buying proporty in London like there is no tomorrow. Why? Fears about the (distant I believe) possibility of Greece going back to some form of drachma and tax invasion reasons possibly too. Implications? Well, other than overheating the London property market, there are little direct implications to the Greek day to day life. Yes, it makes more difficult the greek economy to grow. But it is part of a number of changes that happen there as part of the crisis; massive immigration to countries such as Australia (that actively advertises in the greek media for highly skilled professionals).

I also disagree with some other assumptions made here but let me mention just a fourth party that has actually been asked to "bail out" Greece (in the true sense of the word for the first time as they look to take a haircut on the loans they gave out): the private sector i.e. the banks (not ECB) that have accumulated enough interest already from the interest payments that a 50% haircut is in reality something around 20% of actual loss. And this is part of Merkel's "moral argument" that includes the private sector taking a hit for their irresponsible past lending...

Ian Ringrose

12:14 PM, 21st November 2011
About 9 years ago

I think this is a warning to everyone that rents more than the most basic room to anyone that gets housing benefits. The hard working classes may rebel at some point and be no longer willing to proving more than bread, water and bare minimal shelter to the benefit classes. (Think of the effect on rent and hence values in some areas that at present have the best returns.)

Mary Latham

13:21 PM, 21st November 2011
About 9 years ago

I hope I never see the UK become a place where thoes who have are unwilling to help those who have not. I realise that funds are stretched and that benefits need to be controlled but there are many vulnerable people in this country who are unable to take care of themselves and God help us all if we allow them to suffer for those who misuse the "system". Tigher controls are needed and the realisation that we cannot afford to pay benefits to those who have recently entered the country until they have made some contribution to the "pot".

Landlords need to keep an eye on the changes that are coming in the benefit system and in particular position themselves safely when the Universal Credit kicks in and direct payment and specific LHA payments no longer exist. I am working hard with all my local authorities to ensure that the PRS continues to thrive because without us everyone will be in trouble.

I have no comment on the grown up content of your very interesting post Mark but thank you for your well informed comments.

Ian Ringrose

14:00 PM, 21st November 2011
About 9 years ago

"I hope I never see the UK become a place where thoes who have are unwilling to help those who have not."

Totally agreed, but the time maybe coming when the working population are not willing to provide a none-working couple without children with anything more than a room that is just about big enough for a double bed in a basic HMO.

I hope the current package of reforms (Universal Credit etc) works well and are not water down too much – otherwise something more radical may be demanded by the voters in a few years’ time.

The sad fact is that most people are only willing to help others if it does not reduce their standard of living to below what they have got used too – we are starting to see the standard of living of people in good jobs reducing to be lower than what their parents had.

Mary Latham

14:36 PM, 21st November 2011
About 9 years ago

I do see your point Ian but "there but for fortune..." Everyone in work is just a P45 away from needing the help of others and every tenant is a P45 or a change of personal circumstances away from needing LHA We must all be mindful that no one thrives if they feel less than they are and in order for people to get back on their feet they need at the very least a "home" where they feel safe and comfortable. The length of time a person is claiming and the reasons for their claim need to be monitored carefully to ensure that benefits do not become a barrier to work. I have been told many times "I cant afford to work because I will loose too many benefits" and this is unacceptable but it is OUR fault, we have allowed the safety net to become a cage and we all must accept responsiblity and let Government know that this must change. I would like to see a gentle evolution to ween people off benefits and put those who are "working the system" on warning, what I fear is a revolution that will affect the most vulnerable members of our society - not least children who have no control over what their parents do or do not do.

Ian Ringrose

15:12 PM, 21st November 2011
About 9 years ago

Mary,

I think that people that lose their jobs should get more benefits then they do at present with the amount reducing over time, possibility with the level of benefits depending on their average income before they lost work (After all it takes time to move to somewhere cheaper). The real resentment is building up towards the families that have 2 or more generations when on-one has ever worked, but yet they get larger homes that the people that do work. As well as all the single people that said they had a right to steal a large screen TV from a shop because they can’t afford to buy one.

It used to be considered irrational for someone to have children if they could not afford to bring up the children, now in large parts of some cities, a baby is considered the quickly way for a girl to get her own flat!

I have never understood way we are so keen to take benefits away from people on the first day of their new temp job, then make then wait many weeks after the end of the job for the paperwork to be processed to get back on benefits.

In the last year or so, I have notices a real change in the attribute of the people I work with over this sort of issues. Hopefully noone will delay the evolution of the benefit system; otherwise I too FEAR a revolution.

Mary Latham

15:53 PM, 21st November 2011
About 9 years ago

Yes Ian we need to divide the genuinely needy from the greedy and stop incentivising people to choose not to work.

You make a really good point about giving people some overlap when they go into temporary work or on a trial basis - many people are afraid to do this because of the delay in benefits if they fail.

Yes I know what you mean about the change in attitude and we need think very carefully about MOTIVATION see my blog on Maslow & Motivation

12:15 PM, 27th February 2012
About 9 years ago

What would happen, if Greece did Go Bust 


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