How to insure your wealth against a Greek default

The Greek government won its confidence vote. In case you missed it, prime minister George Papandreou had demanded that parliament back his government amid turmoil over austerity measures.

This was a foregone conclusion of course, which explains why the euro actually fell in the immediate aftermath.

No sane politician calls a vote of confidence unless they know they’re going to win it. It’s a theatrical call to arms, rather than a genuine career risk.

Of course, if Papandreou had lost the vote, it could have been very nasty. But his victory hardly means the eurozone is saved (again). There are still some very significant hurdles to jump.

So what happens now?

Greek citizens have no faith in their government

The Greek prime minister might have the confidence of his government. But the Greek people clearly don’t have faith in any of them.

The Greeks have been pulling money out of their bank accounts. The FT reports that €30bn was pulled out of accounts last year, “equivalent to 12.3% of total savings”. In the first three months of this year, savers pulled out €1.5-€2bn a month.

What have they been doing with the cash? As the FT notes, “sales of gold coins have soared as savers seek a safe and fungible source of value”. Others have put their money into land, both here and abroad (where do you think all the money pumping up central London property is coming from?). But the downside with land is that it’s not very liquid if you need to raise funds in an emergency.

As my colleague Merryn Somerset Webb pointed out in her blog the other day, Greek citizens are taking the only sensible option. If Greece was to leave the euro and return to the drachma, anyone with savings in its banks would see their holdings devalued overnight.

It’s a very clear illustration of why gold is worth holding in your portfolio. What else can you do when you don’t trust paper money or the people who issue it? Gold’s primary use is not as a commodity, or even as a currency. It’s insurance. Like any form of insurance, there are times when it is expensive, and times when it is cheap. But if you want to be prepared for the worst, it’s always worth having a portion of your wealth invested in it.

There is no way out without defaulting

So what’s worrying the Greeks? Same thing that’s worrying everyone else. There’s no way they can get out of the debt hole they’re in. It’s too big, as my colleague David Stevenson pointed out last week: What happens when Greece finally goes bust?

Everyone knows this. But no one is yet taking steps to do anything about it. For now, it’s still about ‘extend and pretend’. Papandreou has to go through the charade of pushing another austerity package past the government next week.

Otherwise, say the European Union (EU) and the International Monetary Fund (IMF), they won’t get the next batch of funds from the original bail-out package. Greece needs that €12bn in loans by mid-July, or else it will default.

But playing for time like this merely makes things worse. You can see why everyone involved is doing it. Facing up to a default will be messy and difficult. All parties, from the banks, to the European Central Bank, to politicians, have vested interests to protect. Lots of them are worried that if Greece goes bust, then they’ll be bust too.

However, the longer this goes on for, the more likely a nasty surprise becomes. What if Papandreou doesn’t manage to push the austerity package through? What if the voters in other eurozone countries decide enough is enough? What if Portugal or Ireland, or worse still, Spain, decide it’s time to push for a better deal while everyone is preoccupied with Greece?

One of the most sensible things I’ve read on the whole sorry topic of Greece is in a letter to the FT this morning. It comes from Poland’s former finance minister, Grzegoz W. Kolodko. He speaks from experience, having worked with creditors to write down Poland’s debt in the 1990s.

His point is that private investors can’t hope to get away without taking a hit. But if they take it now, then they can help negotiate the reforms that will help Greece become a much better economy.

“It is already a ‘credit event’… the choice is between inevitable restructuring by design or by chaos. It goes without saying that the latter will be much dearer.”

Prepare your portfolio for a Greek default

We can’t know how the Greek debacle is going to turn out. There are too many variables involved. Things usually have to get really bleak before all parties involved decide it’s time to co-operate. So I can see the situation getting messier before it gets better.

A messy Greek default clearly would be bad news for the euro. Depending on how messy it gets, it could also shake the global financial system quite drastically. You’d hope that after Lehman Brothers in 2008, they’d be better prepared this time.

But there’s no guarantee. Judging by the resistance to reform, it’s pretty clear that your average banker isn’t really that bothered about risk management as long as they’re getting a nice bonus. After all, the government will pick up the pieces – they always have done in the past. That’s moral hazard for you. In any case, keep hold of gold as insurance against anything really nasty coming down the line.

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