Savers rejoice! Greece has been saved from default

Golden egg

Over the past year, a small European nation has posed a big, almost incomprehensible threat to our personal finances.

If Greece had gone through a chaotic default on its public debt, it would have crashed the global banking system and stock markets.


Much like the bankruptcy of Lehman Brothers triggered the 2008 financial crisis and caused the value of our 401(k) plans, Individual Retirement Accounts, college savings plans and other stock- and bond-based holdings to come crashing down.

But today we can rejoice.

The investors that hold an overwhelming majority of Greek debt -- 85.5% of all the bonds in private hands -- have agreed to take a historic haircut.

Those banks, insurance companies and other institutions will write off 53.3% of what they're owed and exchange their bonds for new securities with a lower interest rate.

That will allow Greece to qualify for $173 billion in emergency aid from the European Union and International Monetary Fund -- enough to cover the Mediterranean nation's bills for the foreseeable future and provide enough time to balance its budget.

For much of the past year, a restructuring of Greece's debt seemed too big, too complex and too politically charged for Europe's leaders to pull off.

Yet they did it. And we will benefit from it.

The Greek deal could also provide a blueprint for restructuring the debt of several other overextended European nations, such as Portugal, Italy and Spain.

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

Greek debt had grown to an unsustainable 160% of GDP, and the national government in Athens was out of money.

It had no way of making a $14 billion bond payment due later this month until the International Monetary Fund and European Union stepped up with a plan for an "orderly default."

The plan finalized in mid-February offered Greece $173 billion to keep up with its debt payments until it reaches a point where it can generate enough cash to handle it on its own.

To qualify for that help, Greece was forced to adopt a brutal austerity plan that's slashed government spending and raised taxes while increasing the retirement age and lowering the country's minimum wage.

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

Before it would turn over the bailout money, the EU and IMF demanded that Greece's lenders accept significant losses on those loans -- "take a haircut," in financial jargon.

The key demands: Forgive just over half of what the nation owes, accept lower interest rates on the debt that remains and give Greece many more years to repay those obligations.

They have now done that, and what has been the biggest threat to our personal nest eggs over the past year should fade into the background of financial news over the next few weeks.

It's been a tough four or five years for most middle-class American savers trying to provide financial security for their families. We haven't had much to celebrate.

But the final act of this long-running Greek tragedy looks like it's going to provide us with a happy ending -- not another tragedy.

You can follow on Twitter and Facebook.

Leave a Reply

Your email address will not be published. Required fields are marked *