While the two are literally a world apart, Greece and a homeowner in Youngstown Ohio have something in common. They are both so indebted and under collateralized that they have no hope of repaying. The difference is that the homeowner in Ohio and their bank have accepted reality - that default was inevitable - and the Europeans are about to.
The ECD and IMF and European banks are still trying to modify Greece. The Ohio homeowner is past that! The creditor in the case of the Ohio homeowner tried modifications too, but in the final analysis there was no way to achieve any viable situation without massive debt forgiveness. Due to the complicated legal structure of the loan and all the interested parties upstream, as well as the ramifications such a policy action would have on other loans, a straight write-down of the balance was not possible. In the end for the homeowner, foreclosure was the only option.
In effect, the foreclosure results in a write-down for the bank anyway. But where does that leave the homeowner? Better off!! The homeowners credit may be ruined, but by the time of the foreclosure their credit was destroyed already anyway. At least after the foreclosure the homeowner is off the hook for the mortgage note. They are effectively released from their indebtedness and free to start life over financially. And, they can go rent or purchase a different house for a lot less than they were on the hook for before. On the other hand, the bank and whatever investor that owned or insured the loan is left with the loss. Repeat this scenario enough times and you've got the mortgage crisis which ultimately grew so vast that it morphed into the financial crisis of 2008 the fall of Lehman, Fannie & Freddie, AIG, and others.
But what about Greece - who's better off when Greece realizes that there is no hope of repaying their debt and just defaults? What happens when mass opinion in Greece is that the stresses of continuing the struggle to pay its debt is simply not worth it to them! Like the homeowner who realized that it was better to accept a new reality, eventually Greece will do so too. Eventually the homeowner decided, and Greece will too, that they need to walk away from their obligations and let the chips fall. And like the homeowner who enjoyed living in their home for as long as they could while continuing to mount up more and more unpaid debt and interest while enjoying free rent, Greece is going to soak up as much time and debt as possible before they pull the plug.
If it were just Greece, and if it were just one homeowner or even one town of homeowners, the creditors would just lick their wounds and life all around would go on normally except for the debtors. If the default of either the homeowner or Greece were an isolated case, the debtor is up the proverbial "shits river without a paddle." But it's not just Greece and it wasn't just one homeowner that is drowning in debt. Therein lies the difference in the financial dynamics which threatens the world's financial system.
Like the USA housing crisis, the scope of European countries that are insolvent is such that if one defaults and the others follow a crisis is set off. I know it seems like there is already a crisis, but I believe what we have now is "strain." A crisis will be the day Greece or Belgium or some other country throws in the towel and defaults. Unlike the current situation with the USA housing crisis which has been adjusted for with USA banks, in the case of the "PIIGs" and others default is not yet "baked into" the Euro or world banking system. While the USA banks have written down their mortgage losses, the European banks have not written large scale defaults into their capital structure. If one of the insolvent European countries such as Greece defaults, the banks will have no choice but to adjust their financial balance sheets to take into account these defaults on a massive scale. Once they do they become greatly under-capitalized. Then, like the USA banks, they will need the bailout! It will be the sequel to the book, and now the movie, "Too Big to Fail."
From a practical standpoint, the credit rating companies are forcing the issue. Which only raises the cost of carrying the debt to these countries and puts more pressure on them to default. The straw will eventually break the camel's back. It could be today or tomorrow or next week, but eventually Greece and a half-dozen other Euro-member countries are going to give their European friends the bird. It's notable that in the case of the Ohio homeowner they also had to give up the keys to their home. Whereas, at least Greece residents get to stay in country. Greece may be better off - even better off than the homeowner in Ohio.
I'd love to play this scenario out further because the outcome sure doesn't end here. But that's all the time I have for this post!
