Ten Years To Total Destruction
Are you sick of Greece yet? The media has been talking about the Greek debt problem for months now. You can’t open a newspaper or magazine without seeing some reference to the problems in Europe.
I’m all for highlighting problems, but what I really want to know is how do I make money from this fiasco? I’ll give you a great idea in a moment…
Now, I’ve done my fair share of research on Greece. It’s not hard to notice their problems spreading across the rest of Europe. While looking at problems is one thing, not many people know how Greece got into this mess in the first place. It’s a good question.
National Public Radio (NPR) did a great story on the Greek debt problems a few weeks back.
Instead of focusing on the current issues and all the suffering this financial collapse has caused, they focused on its genesis. Where did it all start?
Amazingly, it only took ten years for total destruction.
What happened ten years ago? Greece joined the European Union. To join the EU, Greece had to adopt a whole new level of rules and regulations… and by joining, they received some great benefits as well.
Ten years ago it was difficult to get a loan in Greece.
Interest rates were high (over 10%) and people just didn’t borrow a lot of money.
But that started to change once Greece joined the EU. They began using the euro as their currency. Suddenly, Greek debt was interesting for international investors. The Greek debt markets, once tiny on the global stage, started growing rapidly.
The euro-denominated Greek bonds started finding homes in international investor portfolios. The more these investors bought, the lower interest rates moved. Low interest rates became attractive to borrowers. Suddenly, everyone was borrowing money and spending.
The economic boom was breathtaking.
Greeks were borrowing money to buy houses. They were borrowing to buy cars. They borrowed to take vacations. They even started borrowing to pay back earlier loans.
It was a bad cycle.
While everyday Greeks were sliding down the slippery slope of debt, the Greek government just jumped off the cliff. It was a majestic swan dive.
The Greek government spent way beyond its means for years. They too got caught up in the cycle of borrowing and spending, borrowing and spending. They made dramatic civic improvements. They hosted the Olympics. They started promising more and more money to civil servants and retirees.
The cycle ended just 10 years after it started.
A new government was put in power and what they discovered shocked the world.
The Greek government had been hiding their true levels of debt. What they’d been telling global bond investors was a blatant lie. (Politicians lying to the public… now there’s a shock.)
They had been hiding debt “off the books”.
Global investors didn’t just smell a rat. They watched the rat dance its way through the dining room! Like any intelligent individual, these investors stood up and walked out. They sold off their Greek bond holdings and abandoned the Greek bond market.
Then the situation began spiraling out of control.
Nobody wanted to buy Greek bonds. Investors started worrying about their ability to repay the debt. And interest rates soared.
Just as a comparison, US 30 year bonds yield about 4% right now… Greek bonds pay double the yield… almost 8%.
That means investors see double the risk in Greece.
For businesses and individuals, interest rates are even higher. They’ve shot through the roof and are quickly approaching the stratosphere.
But there’s an even bigger problem. Nobody wants to loan out money. Even if you agreed to pay the huge interest rates, you can’t find a bank willing to lend. And that spells doom for the Greek economy.
In just ten short years, the entire economy went from steady, to booming, to blown-up. It will be years before these problems can be overcome.
How bad is it?
Athens participated in the global rebound starting in early 2009. However, the bounce was short lived. In the fall, when early signs of economic problems stated appearing, the markets started looking like a downhill ski-slope more than an economic recovery.
Many good companies got caught up in this mess.
Take a look at Crude Carriers (CRU). This is a brand new Greece based company. They went public in early March… right as the “you know what” was hitting the fan. Their IPO price was $19 per share. Today it’s trading for just $16. It’s one of the worst performing IPOs in the last few months.
While a lower price is nice, that’s not reason enough to buy a stock.
What’s interesting to me about CRU is their business. They’re a shipping company. They focus on shipping crude oil from place to place. CRU gets paid to run the ship, regardless of oil prices. That being said, higher oil prices can be a good thing.
Higher prices typically mean more demand… and more demand means more oil needs to be shipped around the world. That means more business for the shipping industry… and for CRU.
Once the European debt crisis is contained, the global economic recovery should pick up steam. And that will happen sooner than you think. Oil prices will move ever higher and CRU is perfectly positioned to capture this growth and profit from it.
I’m not the only one who thinks so.
Recently CRU’s CEO bought 25,000 shares on the open market… and the company president bought 6,000 shares. Clearly they see smoother sailing ahead.
Take a closer look at CRU. It’s a great way to make money from the Greek debt debacle.
Category: Foreign Markets
