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March 1, 2012

Greece Could Still Be A Problem

Everyone has been cheering the bailout of Greece as if all of their problems have been solved. The truth, however, is that Greece is facing several high risk short term and long term problems.

For more on the Greek bailout, the Business Insider put together a good summary.

Short Term

Between now and the time that the escrow bailout account is set up the Greeks need to meet a series of austerity conditions. This is not just agreeing to the austerity terms, but having the various programs implemented. To illustrate the ambitiousness of this, many of the Obama Health Care programs were scheduled to be put in place three or four years in the future. Imagine having to put those programs together in three weeks, at most.

Additionally, the 130 billion euro account could be cut off at any time if Greece does not hold up to the agreed upon austerity terms. This could occur simply by the country not cutting enough, but it could also happen if a new political party comes into power with no intention of following the terms of the bailout.

Long Term

The goal of this bailout is to get Greece's debt to GDP ratio down from 150% now to 120% by 2020. While 120% is considered 'manageable,' there are several unknown variables surrounding this. First and foremost, Greece's economy needs to grow in order to get that ratio down. This is something that isn't looking like it's going to happen through 2013.

The next layer is the debt. If Greece is to re-enter the debt markets and attain new financing, it is going to need to attract lenders willing to give Greece funds at a reasonable rate. That could prove to be difficult through everything we are seeing in the headlines today. Would you ever lend money to Greece?

And even if Greece reaches the 120% debt to GDP threshold, a recession could easily send them down the same road that started this slow moving train wreck in 2009. It's very unreasonable to assume there will not be a recession between now and 2020.

If any of these factors becomes a problem, an unexpected default could occur versus one that the markets have seen coming for months, if not years. An unexpected default could roil the markets and send disruptions throughout the financial world, pushing some economies into recession, other economies deeper into recession, and devaluing the euro. Despite the agreements reached in Greece, the world still needs to continue to watch.

The Guardian UK put together a great video describing the Greek's new dilemmas.

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