My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Friday, November 4, 2011

Things that make you go hmmm- If Greece was California

I have been reading furiously trying to grasp the complexities of the Greek bailout and to understand why the European leaders do not just let Greece default. To be brutally honest, I just do not have enough knowledge to comment intelligently about the topic. Many articles discuss a Credit Default Swap (“CDS”) crisis, a product and concept that is very hard to grasp when extrapolated worldwide.

I have read that a Greek default could cause CDS counterpart failure, much of it possibly in the U.S., and also could cause massive deficits in the Eurozone amongst other catastrophic events.Yet, I still ponder; if 50% of Greece’s debt has already been written off, why not just cut Greece loose? Greece is a basket case no matter how you paper the mess. Is it only a question of an orderly disaster vs. a disorderly disaster?

Striving to better understand this situation, I went to one of my retired partners who is fairly sophisticated on worldly matters, and during our conversation he said, “Why bail out Greece if the U.S. doesn’t bail out California? It took me a second to grasp where he was going with this, but what an interesting comment.

I went back to my desk and did some quick comparisons. California is the 8th largest economy in the world, while Greece is only the 32nd largest economy in the world.

For all intents and purposes, both California and Greece are bankrupt.

I wonder how keen the other U.S. states would be to bail out California and whether the American people would have an appetite to do so. We do know the American government has shown no reluctance to do such for large American companies.

As noted above, I am no world economist or political pundit, and although California and Greece have numerous complex issues particular to each, one can also argue they are shockingly close in similarity. Think about that.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

3 comments:

  1. The main problem with Greece defaulting is not CDSs (though they play a part), it's "contagion". Namely, the big French and German banks can tolerate losing all their Greek bonds, but that's it. If Greece defaults, the assumptions is immediately made that the rest of the PIIGS will get a "haircut". And because of leverage, the banks go bust.

    Make no mistake, this is not a bailout of the Greek people, it's a bailout of the French and German banks.

    A good, very prescient writer on Euro issues has been The Telegraph's Ambrose Evans-Pritchard
    I find that's he's often ahead of the rest of the media by a month or more.

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/

    ReplyDelete
  2. Anon, thanks for your opinion on the matter and the link. I will check it out

    ReplyDelete
  3. This short article is a very good synopsis of the current situation, and gives you a good hint of things to come:

    http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/8873041/Europes-rescue-fiasco-leaves-Italy-defenceless.html

    ReplyDelete