Putting Greece through an 'orderly default' is best for our finances

Woman throwing up her hands with broken piggy bank

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

But it does.

The biggest threat to everything from our 401(k) plan to our jobs is the European debt crisis -- and right now that's mostly about Greece.

Simply stated, the Greek government has borrowed way more than it can possibly repay.

It's out of money, and Europe's financial and political leaders are trying to prop up the country long enough to negotiate an "orderly default" with its creditors.

That would require many of Europe's biggest banks to voluntarily write down the Greek bonds they hold before it actually stops making payments on those loans.

That's the best possible outcome for us.

Because the alternative is a "disorderly default" that could plunge us into another financial crisis similar to the one we experienced in October 2008.

And we know what happened to us after that.

Let's just stop for a moment to reflect on how terribly unfair this is.

It's bad enough that our savings and careers have taken a beating because of the American banking industry's reckless mortgage lending.

Now we have to suffer because European banks recklessly allowed Greece to live way beyond its means over the past decade?

We can do all the right things -- finance our home with an affordable mortgage, stay out of credit card debt, contribute generously to our retirement funds.

But our best efforts are often undermined by one political or financial crisis after another that we have absolutely no control over.

Here's why we're on the hook for Greece right now.

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

Greece will owe 160% of its gross domestic product (something like $500 billion) by the end of the year, which is big trouble by almost anyone's definition.

The Greek government has slashed its spending, implementing a higher retirement age and cutting pay for government employees.

When the parliament proposed an additional 3% tax on all income, increased property taxes and cut retirement benefits, all hell broke loose. You must have seen the news about the riots.

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

In fact, it's going through all of this pain to get a multibillion euro bailout from the International Monetary Fund and European Union.

But calling this a bailout is really a misnomer.

The money other countries are providing Greece won't solve the problem; it's just buying time to try and negotiate an "orderly default" with the nation's creditors.

The initial plan approved in July asks Greek bondholders to take a 20% loss on the debt and extend repayment out for many years.

That seemed like a hard, but not impossible, sell that would convince the world's financial markets that Europe has a way to resolve this crisis.

But recently Germany and Denmark have been pushing for bondholders to take a 50% loss on Greek debt.

Given how U.S. banks have stubbornly refused to write down the bad mortgage debt on their books, it's hard to imagine the European banks accepting a haircut like that.

If they balk, then we face the grim prospect of a "disorderly default."

The IMF and EU will end the bailout. Greece will run out of money and stop payments on its debt, throwing the survival of some of Europe's biggest banks into doubt.

We could face another financial crisis similar to the one triggered by the failure of Lehman Brothers and all of the bad mortgage debt it was holding in 2008.

Right now, the Greek government only has enough money to last until mid-October.

If the Greeks don't waver from their harsh austerity program, and negotiations proceed with the European banks, more international loans (bailout funds) should arrive just in time to save the day.

But we really won't know how this will turn out until a deal is struck -- or not -- with the banks. No one knows how long that might take.

Until some resolution is reached, the markets -- and our retirement funds -- will rise and fall on every twist and turn of the process.

About all we can do is wait and see if the Europeans can resolve this mess.

Most savers who held onto their stocks and mutual funds came out of the last financial crisis and recession in good shape. (Panic selling is rarely a smart strategy.)

But that doesn't mean we have to like being put in this position. Again.

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