My Mortgage Blog

For quite some time, we’ve seen the following recurring pattern in the markets related to possible default issues in Greece. First, analysts begin to speak and write about the increased possibility that Greece will have to default on its debts or—rather chaotically—to choose another course, like leaving behind the euro and returning to the drachma. Investor concern over these possibilities causes the euro to shed some of its exchange value, and global equities edge down in possible preparation for a big hit from a full-blown Greek economic tragedy. The Greek government, meanwhile, promises new austerity measures to reduce costs and, occasionally, fires an economic minister (shifting the chairs on the Titanic?). Meanwhile, the promises to cut back governmental programs bring protesters into the streets, and the world worries over growing political stresses.

Then, European officials gather in lengthy meetings, trying to figure out how to restructure or reschedule or reprofile or rollover Greece’s debts to allow it to avoid default or related outcomes. Germany usually takes a hard line, demanding a restructuring of the debt; France tries to draw Germany and Greece closer together; and ultimately, we have photos of Sarkozy and Merkel in our newspapers smiling at each other as a deal of some sort is announced.

That, coincidentally, was where we were this past weekend. The stock markets had already had a bit of time to recover from the latest scare, and we could at least pretend that Greece was moving in a good direction, and we could carry on without worrying overmuch about an exploding credit market that included U.S. Treasury securities.

Now, who in the world ever thought I (who write about the real estate market and mortgage-related concerns) would be writing about Greek finances? I’d far rather be writing about a two-week vacation on Santorini or most any other Greek Isle, and I’d rather not be thinking about Greece as a fiscal basket case—in particular I’d rather not be thinking of it as an economic powder keg whose problems can spread. But there it is. And I fear that we are moving now toward a turning point…and I doubt we’ll like the way things are turning.

In short, we seem to be running out of credible ways to pretend we’re not just kicking the can down the road, postponing what seems increasingly to be an inevitable default. The biggest problem in this regard, most likely, is that the terms of loans are continually running out, and Greece must not only pay them off but also replace them with further borrowing, which is increasingly difficult today since those few creditors who want to loan more money to the country today are demanding unworkably high rates for their money.

So the leaders of the EU are seeking ways to dance around a default. They’ve toyed with requiring lenders to roll over their loans at maturity so Greece would have someone to borrow from. But that requirement is tantamount to default—changing the terms of the loans, writing new ones in their place. So we’re hearing the word “voluntary” a lot, as European leaders seek to squirrel past a default with a group of “voluntary” restructurings of loans.

I don’t see how this can work. Indeed, we may be facing what clearly amounts to a default very soon, with unpredictable results. It’s very possible we’ll enter a time of even greater volatility and uncertainty than the one we’ve been dealing with. It’s also possible that rates may spike (though some analysts believe this mess could result in rates that are even lower than today’s—a reasonable possibility, given that rates have tended to decline recently whenever something goes wrong in our economy).

In any case, do not be fooled by the very temporary decisions reached by the EU. Indeed, The Economist newsweekly warns that Italy will soon face a downgrading of its credit status, and Moody’s and Fitch echoed the warning. It’s probably time to start restructuring the loans of many or most euro-based countries before they utterly unstructure themselves.