For Greece, it’s ‘fool me once, shame on you; fool me twice, shame on me’

I have learned from 40-plus years of investing that debt is never a long-term solution for anything, anybody or any nation. Not too many years ago, Cyprus was going through the same problems that Greece is going through today. In order to provide social programs, the government borrowed money to fund entitlement programs. The problem begins when the amount of money borrowed is greater than the gross domestic product (GDP) of a country.

{mosads}The Cypriot government put currency controls in place that limited the amount of money one could take out of a bank and the amount of money one could possibly send out of the country. So, the Bank of Cyprus closed all the banks, and put in currency controls and eventually took up to 60 percent of a depositor’s money. In keeping with the headline of this article, the bank depositors were initially told that the government would probably only take about 15 precent of deposits over 100,000 euros. When it was all done, many accounts lost almost 60 percent of their deposits. Today, the debt to GDP ratio for Cyprus is approaching 130 percent, and I believe there is no chance of another bailout.

Yogi Berra, the great catcher of the New York Yankees, famously said “It’s like deja vu all over again.” The Bank of Greece has put limitations on how much money could be taken out of an ATM machine; about 60 euros per day. Imagine if you walked up to your ATM and there was a message on the screen that your limit today is $60: How secure would you feel? In addition to limits on ATM withdrawals, the government also put restrictions on money that could be exported out of the country for whatever reason.

As it relates to the taking of deposits to satisfy debts, Greek banks might plan to take about 30 percent of deposits in excess of 8,000 euros, according to the Financial Times. (A Greek official denies this.) I believe this is just an opener, and most likely they will go higher. What concerns me is that the difference between Cyprus and Greece is the starting point; the number people affected will be much higher in Greece. There are a great many more people with deposits of at least 8,000 euros in Greece than the number of people affected in Cyprus with 100,000 euros in deposits.

The referendum that took place on July 5 sent a clear message from the voters of Greece to EU leaders: “We want to have our cake and eat it too.” They do not want the EU austerity program, they do not want to make any concessions on their pensions, they will not give into the people who have loaned them money and expect to be paid back.

There is some degree of irony here. The current government took over from the previous government on the basis that they would eliminate the austerity programs that were needed to help to start working off the debt and solve the budget deficit problem. It wasn’t long after taking power when the government discovered it couldn’t keep its promise. Now it wants to walk away from the debt it owes. People in some circles in Greece see 320 billion euros as a gift, not a loan.

What is the common problem between these two nations? As I said in my recent article on the problems of Greece, its ratio of debt to GDP was 177 percent. An economy cannot sustain itself by borrowing more and more money; it’s just not possible, it has never worked and will never work because some day, the piper has to be paid. The Greek government is trying to get more debt to solve the debt problem; it is like a dog chasing its tail.

I believe several other EU countries may be in financial trouble, similar to the problems in Greece. Other countries in the EU are borderline and need monitoring for potential default.

I chose the headline because, if Greece takes your bank deposits, then shame on you if you had money there, especially if you had money in the Cypriot banks. This problem is not going away until the world begins to live within its means. As difficult as it is to say, I believe a great many investors are going to lose a great deal of money. When the dominos start to fall, they create their own momentum.

Perkins is a Registered Investment Adviser with over 40 years of experience in managing money for clients in a private practice. Perkins has invested money on a global basis and has studied interest rates and bonds in economies throughout the world.