The crisis in Greece and you.

Bear with me while I explain the crisis in Greece, in what I hope is easily understandable terms. It starts like this.

The Chief Finance Minister (CFM) for Greece calls the Chief Loan officer (CLO) for the Bank of America. The Greece CFM says, “I am short of cash we overspent this month can you loan us $10 billion?” The bank CLO says, “ No problem, but I will have to charge you 12% interest because it is a risky loan and we really have no way of reclaiming Greece assets if you default. We know we will never get the loan repaid, but we need the interest payments. ” The Greece CFM says, “No Problem, we need the cash,” and gives the Bank CFO the wiring instructions for the $10 billion. Everyone is happy.

Now the bank CFO does not have the cash either so the bank CFO borrows $10 billion from the USA Treasury at 0.5% interest and loans it to Greece at 12%. Everyone is happy.

Until, six months later. The bank CFO calls the Greece CFM and says, "You need to make an interest payment on the loan of $600 million." The Greece CFM says, “Sorry, but we do not have the cash, we can not make the interest payment. Can you loan us some more money so we can pay you the interest?” The bank CFO says, “We would love too but the USA Government auditors would reclassify your loan as a bad debt and we might have to take the full $10 billion as a loss. We just went though this with the real estate market so we can not do this. I suggest you call the CFO of the International Monetary Fund (IMF) to loan you the money.”

The Greece CFM calls the CFO of the IMF and says, "We are out of cash and if we do not make the loan payments to USA banks and banks in Germany, France and several other countries, then the world economy will collapse. The bank CLO calls the IMF CFO and says, "We need you to loan Greece the money so they can pay the interest to us and we can avoid a world economic collapse." The CFO for the IMF after several days of negotiating calls the Greece CFM and says, "We will loan you the money, but we will have to charge you a high interest rate because it is a risky loan." The Greece CFM says, “We understand and we are cutting back on spending so we can make the interest payments to you and the other banks with no problem in the next few years.” “Terrific,” says the CFO of the IMF. And everyone is happy.

However, the IMF has no cash to make the loan so it goes the Treasury Departments of Germany, France and the USA and borrows the money at 0.5% and loans it to Greece at 12% interest. The Greece CFM then pays the money to the USA Banks. And everyone is happy.

Until a few months later. The USA treasury secretary suddenly realizes that it has loaned out all its money and it needs more cash for its own expenses. It instructs the treasury department to sell bonds to raise some cash. It does. The Greece CFM, which now has $10 billion in cash and is pretty sure it will never pay back the principal and will just borrow more later anyway to make the next interest payment, buys US treasury bonds as an investment. It can not by all of them so China, flush with cash from toy exports to the USA, buys the rest.

Everyone is happy. Until later when the next interest payment is due. And it will become due.

Keep reading my blog for more simple explanations of your money in a global economy.