Debt

The country of Greece is in the news and I want to comment on it as it may relate to the US economy. There are a number of big banks who have invested in Greek government bonds and they are being asked to take a haircut. That is money talk about devaluing the bonds. Now at first you might ask why would the banks go for this but it is not what it seems. If the banks agree to lower the payments for Greece they will merely adjust interest rates. For example if you have a home loan of $200,000 at 4% for ten years, your monthly payment is $2025 and your total interest payments over the ten years are $42,988. If you exchange that for a loan of $100,000 at 8% for ten years your new payment is $1,213 and your total interest payments are $45,593. The government gets the advantage of lower payments but the total interest doesn’t change that much. The banks may well say that they will cut the loan value in half but you have to pay more interest and longer time and these factors will be negotiated. Greece will then be doing what many states and many individuals have done. California recently exchanged short term bonds for long term bonds to lower payments but in the long run they will pay more interest. The big concern about Greece is that it is itself like a large bank that is too big to fail. It is referred to in the financial news as a contagion meaning that if Greece goes down it will take the rest of the Euro Countries down with it and then the US will be next.
I am reminded of the old adage that if you owe the bank $10,000 they see you as a debtor but if you owe them $10 million they see you as a partner.