American savers should benefit from Greece bailout, orderly default

Dollar sign in nest

What happens in Greece shouldn't affect our retirement savings or kids' college funds.

But it does.

For most of the past year, the biggest threat to our savings has been the European debt crisis -- and Greece has been the leading player in this tragedy.

So the new $173 billion bailout agreement announced today in Brussels is an encouraging outcome for American savers.

It's not a totally done deal. The major European banks and hedge funds that own most Greek bonds still must accept the epic haircut the agreement requires.

But the announcement was greeted as a major step toward resolving Europe's debt crisis, and it pushed the Dow Industrial Average above 13,000 for the first time since May 19, 2008.

The problem is pretty simple: The Greek government has borrowed way more than it can possibly repay.

A country is considered to be in trouble when its debt exceeds its annual gross domestic product (GDP).

Greece debt is now estimated to be an unsustainable 160% of GDP, and it's out of money.

Without help from the International Monetary Fund and European Union, it will almost certainly miss a $14 billion debt payment due in mid-March.

That's why the IMF and EU have spent that past nine months devising an "orderly default" for Greece and its creditors to pursue.

The fear is that a "disorderly default" such as that could plunge the world into another financial crisis similar to the one that Lehman Brothers created when the New York investment bank went bankrupt in 2008.

The agreement announced today requires Greece to use the $173 billion it's being offered to keep up with its debt payments until the nation reaches a point where it can generate enough cash to make the payments on its own.

To qualify for that help, the IMF and EU have required the Greek government to implement a brutal austerity plan that's done everything from slash spending and raise taxes to raising the retirement age and lowering the nation's minimum wage.

But Greece is in way too deep to solve its problems through budget cuts and austerity measures alone.

Its creditors must also agree to take huge losses in order to reduce the Mediterranean nation's debt to a more manageable level.

The goal is to reduce Greek debt to something like 120% of GDP by 2020.

Back in July, the IMF and EU said Greek bondholders would need to take a 20% loss on the face value of that debt, accept lower interest rates and extend repayment by many years.

But as Greece's problems grew worse, the plan was revised last fall to require bondholders to write off 50% of the nation's debt.

The final deal announced today will ask them to reduce the face value of their bonds by a whopping 53%.

The big catch is that the EU and IMF want 95% of Greek bondholders to accept those losses before it releases the bailout money.

Will they do it? Who knows.

Europe's leaders will take their proposal to what's called the Institute of International Finance, a group that represents the banks and hedge funds that hold such bonds.

The institute will review the details and make a recommendation to its members. But in the end, it will be up to each bondholder to decide whether or not to go along with the restructuring.

If too many investors refuse, then the IMF and EU may be forced to negotiate less onerous terms, delaying the bailout.

About all we can do now is wait and see if the Europeans can twist enough arms to keep the process moving forward.

The markets -- and our 401(K) plans and Individual Retirement Accounts -- will continue to rise and fall based on the outcome of those talks.

But the way this Greek tragedy is unfolding, it may have a happy ending for us.

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