The Debt Crisis in Greece Threatens the Global Economy

There is renewed interest in the debt crisis in Greece. Why this has any influence on our markets baffles most individual investor's trying to make a profit with their stock portfolio. I cannot stress enough why this is important. We need to understand what affect this has on our stocks, bonds and businesses. After all Portugal just got downgraded and faces the same issues as Greece.

What Caused the Debt Crisis in Greece?

For years now the Greek government has over-spent their budget. At this point their national debt, according to some, will reach 120% of their gross national product. About a 12.7% deficit or shortfall.

For years interest rates on borrowing have been very low causing a flood of debt that now can't be repaid, further exasperating their national debt problem. But the real problem lies in failure to put financial reforms in place to correct and manage this problem. Now enter the global recession the catalyst to sink this tiny European nation as credit gets extremely tight in financial markets the world over. Interest rates become a problem. Greece can't borrow to refinance existing debt, which means they stand a chance of default or currency devaluation.

What Does the Greek Government Do Now?

The first thing is to seek help from the other Euro Zone nations. This has been met with public promises from Euro Zone nations that they will be a solution of last resort. So far nothing has come from Euro Zone nations causing every country worldwide to seek funds as recovery gets stymied. The Germans think the Greek issue is being over exaggerated.

The Greek government now has started to implement budget cuts, enact new income tax laws, cut government salaries, change retirement age, and enact strict penalties for income tax evasion. Doesn't sound like the Greeks are bluffing at all.

Greece is viewed by the rest of the world as a monetary risk and has raised interest rates or denied them access to loans. This further exasperates the Greek issues and causes them to seek relief through the International Monetary Fund (IMF).

What Implications Does This Have for the Rest of the World?

The implications are that since the global recession started, world governments everywhere have had to spend big on stimulus packages to keep their economies from collapse. This means that interest rates are going up just like in Greece as the world realizes the risk some countries such as Spain and Portugal have had to content with because of their massive debt loads.

Massive debt loads mean more taxes, less spending by governments as they redirect revenue flows to pay interest and reclaim productivity. This is cause for alarm among citizens of these countries they face large-scale unemployment and a world where credit is hard to come by.

The United States is no different then Greece just larger. As time marches on it is necessary to cut programs and cost that are extraneous in nature.

Countries depend on selling bonds to finance their governments, but only so many can get sold without causing interest rates to skyrocket. As bond holders wane governments intice them back with higher interest rates.

Health Care Legislation is President Obama's #1 Concern

President Obama realizes the day of reckoning is just around the corner and massive amounts of people don't have insurance or a means of paying for what has become a very expensive health care system. He must get these cost under control or they can overcome our society and place us in great peril. Unemployment is causing this whole system to become one for the affluent while the poor are scraping to get by. As the health system starts to breakdown this takes with it a huge amount of jobs. This would cause large amounts of unemployment, defaults and foreclosures. this leads to larger deficits and more government spending.

As cost go up profits are strained and massive defaults and government systems grind to a halt. Problem is that Health Care Reform itself causes more spending. Will it be in time or is it already to late? That in itself will cause concern for our corporations and governments.

Increased Interest Rates for Corporations

With tight money policies and debt default comes higher interest rates as corporations the world over see cost rising. The additional cost get passed on to the consumers in terms of higher prices. As earnings begin to fall so do stock prices. Our society becomes a nation of debtors who can't repay their loans and support their families. Cost for commodities drop and consumer goods collect dust in warehouses.

The Greek debt problems continue to plague the market. Until they get relieve either from other Euro Zone countries or the IMF they will weigh heavily on the stock and bond markets worldwide.

In April and May a mountain of Greek debt comes due as all the world watches. Will the recovery continue or stall on government default worries?