Tuesday, June 28, 2011

Greek Debt Crisis and Hawaii

We have been watching the Greek Debt Crisis for over a year now and wondering what effect a default of Greece’s loans will have on those of us living in Hawaii. We found evidence that Hawaii has already felt the crisis and the consequences will likely grow over the next year. Here is a list of what we have observed from the unfolding crisis and why it may matter to us:
  • The European Central Bank has worked hard to keep the Euro currency at a maximum valuation, which is making a vacation in Hawaii the most affordable in decades for visitors from the 17 member countries of the Euro Zone.
  • The daily riots in Athens is convincing many Europeans that normally vacation in Greece to go elsewhere this year. We are seeing Europeans everywhere on the Big Island, in the shops, on the beaches, at the resorts, and the traditional holiday season for Europeans doesn’t even start until August.
  • By July 16, 2011, a complex set of agreements must be reached by the IMF (International Monetary Fund), the European Central Bank, the country of Greece, and the major banks of Europe. If the agreements are not all in place on that day, Greece will technically be in default on its bonds. With the new set of international banking laws in place, this “default” will mean that many of the largest European banks will be bankrupt, overnight. It is estimated that mutual funds and other retirement funds in the US own in excess of 1 trillion dollars in equity in these European banks! So, there is the possibility that many Americans will wake up on July 17 and find that their assets, retirement accounts, and college funds are suddenly much smaller if the European banks go bankrupt. The loss of a trillion dollars in the bank stock values will probably not help overall stock prices this summer and might even cause a global stock crash if people sell off other stocks in a panic. We think a large drop in the value of stocks this summer would be negative for Hawaii’s tourism from visitors from the mainland.
  • Several of the largest European banks own major assets in Hawaii. BNP Paribas, a major French bank, owns First Hawaiian Bank for instance. Paribas is one of the largest holders of Greek debt. Deutsche Bank AG, a large German bank, has been a major mortgage lender in Hawaii over the last decade. If these banks go bankrupt it may disturb our local Hawaii banks and potentially force local assets and real estate to be liquidated. This scenario could get worse if Spain, Portugal, Ireland, and other European nations also default on their loans this summer.
  • The Greek bonds are insured by companies that created derivatives from the insurance policies; these derivatives are unregulated financial instruments owned by institutions and funds all over the world. The owners of the derivatives consider them assets so if the Greeks default on their bonds, these derivative assets will suddenly become liabilities to the institutions and companies holding them. As it is revealed who owns these derivatives, there could be a second round of global stock devaluations, and another round of bank and insurance company bankruptcies.
Although these scenarios are gloomy, it is most likely that the situation in Greece will stay the same and another round of emergency funding will be scraped together to delay the financial problems another year. But no matter what happens, the exceptional weather here in Hawaii will continue and the European tourists being drawn to Hawaii this summer may turn into regular visitors for years to come.

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