EDMOND — You have no doubt heard the concerns over Greece and whether they might default on their government debt. Their bonds have been downgraded to junk status by S&P and the interest rate on short-term Greek bonds is more than 20 percent. When a country has to pay more than 20 percent to borrow money, you know there is extreme worry that the money will not be paid back. Until this happened, I used to joke that the only people who got more than 20 percent on a loan was the mafia.

The question for many people is whether Greece will default on its debt. In my opinion, it’s not a matter of “if” Greece will default but “when.” I see no way out of this for them and they eventually will have to default or restructure their debt obligations. Perhaps they will have a nice pleasant word for it and call it something else, but the end result is the same.

Many people think this is just a problem for Greece or the Eurozone and really doesn’t matter to the rest of us. But is that really the case? What might be the effect on the global economy if Greece were to actually default on the debt? Savers all over the world and U.S. retirees likely would be impacted in some way. We could get a domino effect if things really get out of control.

Greek banks are heavily exposed to their own sovereign debt and a default would require many of them to seek new capital to make up for the losses.  This likely would trigger a run on the banks by Greek depositors. If you were a Greek citizen with money in the bank, what would you do? You can be quite sure that anyone with any kind money in Greece is trying to get it out of there. It is very likely that the Greek government would be forced to declare a “bank holiday” to prevent a run. Eventually, the most exposed Greek banks would have to be nationalized.

Europe’s banks are big holders of Greek debt. They are holding about $53 billion with France, Germany and the U.K. the most exposed. If bondholders were required to take a 40 percent “haircut,” i.e. reduction in what they will get paid — a figure thrown out by many analysts — this would translate to losses of about $22 billion in U.S dollars. This would cause many of these banks to be undercapitalized, which is why they desperately want to keep propping up Greece in the hopes that this problem will somehow go away.  It won’t.

Remember the term “Credit Default Swaps?” Most people had never heard of them before the AIG blow-up. A Credit Default Swap, or CDS, is basically a financial institution selling an insurance policy on a bond that would pay the holder the value of the bond if the issuer defaults. They are traded in private transactions and no one really knows for sure how many are out there, who the counter-parties are, and what type of collateral exists to be sure the issuer can actually pay off if there is a default.

According to economist Kash Monsori, in looking at a detailed report from the Bank of International Settlements, U.S. banks have sold about $120 billion of credit default swaps to European banks. A default would trigger a “credit event” payout on these insurance contracts. Remember AIG? They were issuing CDS’s on mortgage-backed securities and were on the hook for far more than they could pay when it all blew up. Let’s think about that for a minute. When, not if, Greece defaults, U.S. banks are going to have to dip into capital to pay those commitments. Capital that should be available for loans to businesses but will have to be paid to European banks instead.

If doubts about the stability of financial institutions with direct and indirect exposure to Greece spread, it could lead to another global credit crunch.  Banks may hesitate to extend credit to each other out of fear about exposures. Many would require counter-parties to hand over additional collateral, forcing assets sales. In a repeat of the aftermath of the bankruptcy of Lehman Brothers, global credit markets could seize up.

It’s not just Greece though. Ireland and Portugal are facing years of slow economic growth as their governments attempt to bring down debt levels and stabilize their banking systems. A default by Greece — especially if brought about by a popular uprising — could encourage these countries to default. If Greece can force creditors to take a haircut, why should Ireland and Portugal pay in full?

The turmoil across Europe may shake the government in Germany. The German people strongly oppose bailouts of what they view as less responsible countries. Any moves by the German government to alleviate the crisis caused by Greece could be met with a political revolt in the already shaky government of Angela Merkel.

U.S. consumer confidence is already at record lows. A global credit crisis likely would convince U.S. consumers to reduce spending and increase savings. This could drag the already slowing American economy nearer to a recession.

I could go on and on, but you get the point. Will any of what I described actually happen? Who knows? It is certainly possible and something to be aware of. Any way you look at it, this is not just a little problem in Greece.  It affects all of us and you need to understand the implications of it for your investments. If your financial adviser is not telling you how he or she is going to deal with this, you need another adviser. Perhaps even me. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.