14:25 PM, 19th November 2011, About 12 years ago 9
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:-
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 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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