The Big Fat Greek Crisis

Greece is getting closer and closer to defaulting on its debt, and droves of people are forming lines around every part of the country to salvage the cash they have left available from local ATMs.

With a bank holiday in place, the European Union is teetering on the decision of expelling Greece, the result of one too many delinquencies. On one hand, the drachma is quickly approaching reentrance into the marketplace completely annihilating any financial benefit to those that currently hold euros. On the other hand, Americans -- and anyone else outside of Greece -- could benefit enormously by vacationing in the midst of crisis.

A full transcript follows the video.

Kristine Harjes: The big fat Greek crisis. This is Industry Focus.

Welcome to Industry Focus, financials edition. I'm your host Kristine Harjes and I'm happy to welcome back to the show, John Maxfield. He's The Fool's senior banking analyst. John, Yassou! That means hello, and Goodbye in Greek, according to the YouTube tutorial I watched before we started taping.

John Maxfield: How's it going? I will remember that. That's a good thing to know. Particularly next year, it could be pretty cheap to travel to Greece. I know that's being insensitive to what's going on right now. If that is the case and I make my way over there I will be sure to keep that in mind.

Harjes: I'll be sure to send you some links. The same guy also had a couple YouTube videos about how to tell people "Leave me alone", which seems like it could also be helpful.

Maxfield: That's great. What about "Where's my money?" That would probably be a pretty apt phrase, right?

Harjes: That's his next episode.

Maxfield: Once again, that's extremely insensitive. I apologize.

Harjes: So, as you may have guessed; whether from my corny movie reference to open the show, or our super multi-language exchange here, or maybe just because you opened a newspaper this morning and saw the biggest story going on right now in financials. We're going to be talking about the situation unfolding in Greece right now. John, before we dive deeper into what's all going on and some implications, can you fill in our listeners on the most recent news?

Maxfield: Sure. What's going on is, Greece has a large debt load and the other members of the European Union -- led by Germany in particular -- have been unwilling to bail Greece out and have ben forcing austerity measures and spending cuts on the Greece government over the last few years. Everything has come to a head in Greece. There's been significant populous angst against these austerity measures and that has made the Greek government -- which the newest government was just put in not long ago -- relatively unwilling to negotiate on the terms of some type of debt forgiveness, or restructuring.

Now I think the timeline is beginning of July for all of these things to get sorted out. If it's not sorted out by then there's the potential that, for all intents and purposes, Greece will be kicked out of the European Monetary Union. That has triggered a lot of economic chaos in the country, and in the European Union.

Harjes: I'm seeing all these pictures about people lined up at ATMs. What's that about?

Maxfield: The biggest problem right now that Greece -- if you're looking at the most eminent problem that it faces -- because all of Greece's banks are part of the European Union, they all hold euros. That's what they use to transact with their depositors and their borrowers. If Greece is kicked out of the Euro, presumably it will go back to its old currency and that currency will be unmoored from this huge European consortium it will be flailing in the wind. Presumably we'll see massive inflation like we saw in Germany when it was trying to work through its reparations in the 1930s.

That inflation, in these banks, will turn those euros into something that is worth a fraction of their worth right now. What all the Greek people are doing is going to the banks, withdrawing their deposits as quickly as possible before this happens, and that's triggered these massive, countrywide bank runs at Greek banks across the country. So the Greek bank has come in and instituted -- it was originally a one day national bank holiday, but it looks like it's turned into a weeklong bank holiday that will end after a referendum by Greek voters on the contours of the Greek debt clock on July 5^th.

Harjes: So that's a lot going on right there. Let's unpack that a little bit. Let's start with the referendum that you just mentioned. What exactly is the issue that's coming up at this referendum, and what could it potentially resolve?

Maxfield: Well, the underlying issue is how much more Greece should be expected to reduce its public expenditures to bring its debt to GDP ratio back to what its European partners in the IMF consider to be reasonable. In the past Greece has gone along with these things, but as the economic situation and the austerity measures have turned the recession into what is -- for all intents and purposes -- a depression in Greece, as that has happened, the Greek people have started fighting against their government.

They're saying "We shouldn't be forced into further austerity measures." It's all about whether or not the Greek people, in order to stay in the European Union, will be willing to take on further pain economically in order to be willing to stay there.

Harjes: If they say "No thanks", what's going to happen?

Maxfield: If they say "No thanks", it is a negotiation so it depends on whether the Germans and the other members of the European Union and IMF are willing to change their position on the whole thing. Assuming that Greece says "No" and then Germany, the IMF, and the other members of the European Union are not willing to make adjustments either, it looks like the only alternative is for Greece to leave the monetary union, and have its own currency.

We've already touched on the issues that it will cause there, but it will cause pretty significant volatility in both fixed income and equity markets around the world as well.

Harjes: With the banks closing today, or through the end of the week, what is that going to fix? Isn't this just delaying the issue and kicking it down the road a bit?

Maxfield: That's a good question. My initial response is "Yes, that's exactly what it's doing." Then once the banks open back up on Monday or Tuesday of next week, if Greece is still on the euro at that point and there's been no resolution to what's going on; the bank runs will just pick up again. Once those bank runs pick up again, if it gets too bad it can cause all those banks to fail because they'll be pushed into a liquidity crisis. There's really no other way to look at it. Basically, all of Greek banks will fail and you can imagine what that will do to their economy in terms of making things worse.

Harjes: Is this totally unprecedented? Do we have any other examples from history that we could pull form and try to speculate on the similarities to see where Greece might be headed?

Maxfield: In the United States we had a week long bank holiday in March of 1933, right after Franklin Delano Roosevelt came into office. This was in the midst of the great depression. People were running on banks across the country, so we closed them for a week. Once we opened them again, Franklin Delano Roosevelt took that opportunity to have his first fireside chat in which he explained the situation to American voters. Just through sheer force of leadership, it was the first time -- for all intents and purposes -- an American president had used the radio and addressed the entire population.

He was able to stop the bank run once the national bank holiday opened up again. In fact, people started depositing money as soon as the national bank holiday stopped. So, through leadership he was able to stop that. This is a totally different situation that we're dealing with in Greece because you have these external factors where, if an agreement isn't reached between Greece and its creditors, Greece will be forced to switch its currency from euros to drachma. That situation wasn't present even during the great depression in the United States.

It's that threat of switching those currencies from one that's worth something to one that's worth significantly less that's causing people to run on the banks. Basically, everything is dependent on whether or not Greece and its creditors can come to a decision.

Harjes: Right. That's why you've got these incredible lines and all the pictures that we're seeing of people at the ATMs. Which, by the way, are incredible because the limit on ATM transactions is 60 euro right now. They're capping it there. That's a mind-blowingly small amount.

Maxfield: Yeah. Think about if your rent came due. This is a week that straddles the change in a month, right? The 29^th today, the first is going to be on Wednesday.

Harjes: That's a good point.

Maxfield: So you're going to have all your monthly payments coming due at the beginning of next month and all of your money is locked up in banks. Presuming that you didn't get it out beforehand. It's a very serious situation.

Harjes: Indeed. One last question for you, John. What would be the effect on the U.S. banks that we could be looking at here?

Maxfield: Well, the big problem over in the United States -- it's not that banks haven't had time to repair this. It's not like a black swan event, if you will. Bankers have known for a while now that Greece is influx. So they've been able to take steps to protect themselves and their shareholders and depositors. However, where we will see the impact is in -- the point being that there isn't quite as much immediate exposure of U.S. banks to a Greek debt, or to loans to people in Greece that would be in threat.

What we will see -- and this is particularly going to hit those banks in large capital market operations like your Citi Groups, Bank of Americas, JPMorgan Chases -- you're going to see volatility in your fixed income markets because the interest rates are going to go all over the place. Obviously, any exposure to Greece is going to be toxic. The other thing that's going to hit the U.S. financial system more generally is, if things deteriorate in Europe further, and if that causes any type of incremental deterioration in the United States' economy; that could delay the Federal Reserve's decision if things continue to improve over here.

Everyone believes this to be a relatively eminent decision to increase short term interest rates. Increasing short term interest rates will increase profitability at banks. If it delays the Federal Reserve's decision to increase interest rates it will keep U.S. banks still in their less than maximum profitability situation that they've been in since the financial crisis.

Harjes: 'Relatively imminent' being the keywords there. On a positive note, international cards in Greece right now are getting unlimited withdrawal. So if you're concerned about any friends or family members vacationing over there they should be fine. If you're not already over there, now might be a great time to go visit Europe. The euro is pretty much tanking on this news which means travelers coming from non-euro countries can enjoy pretty favorable exchange rates that make everything cheaper. Your hotel rooms, your food; so if you've ever wanted to know what it feels like to get a lot richer pretty fast, a plane trip could be in order.

As for me, I think I'll just keep hanging around at Fool HQ here in Alexandria, Virginia. Maybe looking for a market dip to provide me with some good buying opportunities. John, thanks so much for being here. Folks, thanks for listening. Be sure to keep an eye on this situation and let us know your thoughts. You can reach us as always at [email protected]. Yassou!

As always people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So, don't buy or sell stocks based solely on what you hear.