(CNN) -- European Union leaders have hailed an agreement to use funds from both Europe and the International

Monetary Fund to help financially-crippled

Greece as important for the euro zone.

So what's the problem in Greece?

Years of unrestrained spending, cheap lending and failure to implement financial reforms left Greece badly exposed when the global economic downturn
struck. This whisked away a curtain of partly fiddled statistics to reveal debt levels and deficits that exceeded limits set by the eurozone.

How big are these debts?

National debt, put at €300 billion ($413.6 billion), is bigger than the country's economy, with some estimates predicting it will reach 120 percent of gross
domestic product in 2010. The country's deficit -- how much more it spends than it takes in -- is 12.7 percent.

So what happens now?

Greece's credit rating -- the assessment of its ability to repay its debts -- has been downgraded to the lowest in the eurozone, meaning it will likely be
viewed as a financial black hole by foreign investors. This leaves the country struggling to pay its bills as interest rates on existing debts rise. The Greek
government of Prime Minister George Papandreou, which inherited much of the financial burden when it took office late last year, has already scrapped
most of its pre-election promises and must implement harsh and unpopular spending cuts.

Will this hurt the rest of Europe?

Greece is already in major breach of eurozone rules on deficit management and with the financial markets betting the country will default on its debts, this
reflects badly on the credibility of the euro. There are also fears that financial doubts will infect other nations at the low end of Europe's economic scale,
with Portugal and the Republic of Ireland coming under scrutiny. If Europe needs to resort to rescue packages involving bodies such as the International
Monetary Fund, this would further damage the euro's reputation and could lead to a substantial fall against other key currencies.

So what is Greece doing?

As already mentioned, the government has started slashing away at spending and has implemented austerity measures aimed at reducing the deficit by
more than €10 billion ($13.7 billion). It has hiked taxes on fuel, tobacco and alcohol, raised the retirement age by two years, imposed public sector pay cuts
and applied tough new tax evasion regulations.

Are people happy with this?

Predictably, quite the opposite and there have been warnings of resistance from various sectors of society. Workers nationwide have staged strikes closing
airports, government offices, courts and schools. This industrial action is expected to continue.

How are Greece's European neighbors helping?

Led by Germany's Chancellor Angela Merkel, all 16 countries which make up the euro zone have agreed a rescue plan for their ailing neighbor. The
package, which would only be offered as a last resort, will involve co-ordinated bilateral loans from countries inside the common currency area, as well as
funds and technical assistance from the International Monetary Fund (IMF).

According to a joint statement on the EU Web site, a "majority" of the euro zone States would contribute an amount based on their Gross Domestic Product
(GDP) and population, "in the event that Greece needed support after failing to access funds in the financial markets."

This means Germany will be the main contributor, followed by France. Although the announcement did not mention any specific figure, a senior European
official quoted by Reuters said that the potential package may be worth around 20 billion euro (US$26.8 billion).

However any European-backed loan package requires the unanimous approval of European Union members, meaning any euro zone country would have
effective veto power.

The problem started long before the current situation. Greece has been living beyond its means for a long, long time. In fact, from the time it joined the euro
zone, its deficits have been higher than 7 per cent, which is more than double what they're supposed to be to belong to the euro. Greece has structural
problems within its economy that it never really resolved. It's a very small economy with a very large public sector which accounts for about 40 per cent of
its GDP. It was deficit spending all along and the 2004 Olympics made things even worse.

Then along came the global financial crisis which meant that suddenly Greece was faced with even more severe economic problems and had to come up
with more money for social spending, unemployment was rising, and the economy was getting even weaker, which meant it had to borrow more money to
keep things afloat. As long as rates were relatively low, they could keep that thing going.

Warren Buffett once said that in a financial crisis you see who's swimming naked. Well, the Greek’s have no clothes, and that's been going on for a while.
What precipitated this actual crisis is that when the Greeks looked at their treasury, they realized that they didn’t have enough money to keep financing
their deficit, which is growing alarmingly. Their interest costs are now so high that they account for more than 22 per cent of all government revenues,
which means that merely one in four dollars the Greeks collect has to go just to pay the interest on their debt. That's about €1.5-billion a month.

Who suffers if Greece defaults on its debt?

Anybody who's stuck with Greek bonds, that includes foreign institutions, foreign governments, foreign banks, a lot of pension funds, which in fact were
attracted to Greek bonds in the first place because they were getting higher yields than they could on other euro bonds. So if you believe the euro's pretty
safe, why buy German bonds when you can get much more yield from Greek or Portuguese or Spanish bonds, and that's what attracted people to it, in the
belief that there would be no danger of default, and Greece had an investment grade credit rating from the ratings agencies, which made it eligible for a lot
of pension fund investments. These pension funds are not allowed to hold any bonds that do not carry investment grade ratings.

What do the high yields of Greek bonds tell us about the credit worthiness of the country?

They tell us that it's not very credit worthy. When you have to pay 24 per cent to get people to buy your bonds, they don't think that your word backing those
bonds is worth very much. The real risk of default causes investors to demand those kinds of yields, and only people who play in that sort of market, which
is high, high risk bonds, are going to invest in them. Most institutions won't touch them -- they're not allowed to under their own covenants because of the
risk attached. Of course, they're now fearing they will get much less than the face value of their investments when they have to cash them in.
The Greeks are not able to issue new bonds with those rates -- they can't do it because they can't afford it, so we're not seeing any new issues. The
Greeks are basically being frozen out of the bond market for now. There is going to be, if not a default in actuality, it will be what's known as a soft default,
whereby the Greek government negotiates new terms with these creditors and basically says, we can't give you cash for your bonds, but we can give you
new bonds for your old bonds. These new bonds will carry higher interest rates in some cases and lower principal payments, in other words, they're going
to have to accept less than thought, and there are estimates ranging anywhere from a 30-to-70-per-cent reduction on the actual value of the bonds they
hold, and that doesn't mean they get the cash right away. They get new bonds that mature at a later date than the bonds they currently hold.

How is the current crisis connected to the financial crisis of the past two years?

It's intimately connected with it because as the markets closed up and the global economy started coming to a halt, that hit the very small Greek economy
directly. Its key sources of revenues are things like tourism and of course that was way down because of the global economic problems. At the same time,
borrowing costs rose, lenders became much edgier about giving money to questionable borrowers and in the case of Greece, the Greek banks are heavily
exposed in the Balkans -- they've been lending a lot of money to places like Albania, Macedonia and Serbia, and to do that, they'd been borrowing from
bigger banks and Germany, France and elsewhere, and securing those loans with Greek government bonds as collateral. It's the same at the European
Central Bank. If a bank needs overnight financing from the ECB, it puts up Greek government bonds as collateral. But the ECB is not allowed to accept any
bonds that aren't investment grade, so if Greece’s bonds are suddenly turned to junk by the rating agencies, the ECB is not allowed to accept that
collateral, which means it can't give money to the Greek banks. So that's a major problem and a lot of that was precipitated by the initial financial crisis
because once credit markets froze up, they just lost access to all kinds of potential funding that was available before at relatively low rates.

Remember that interest rates were very low, you could borrow really cheaply, and that enabled them to finance incredibly profligate spending. Some of it
was required by Greek law, because they have a huge social safety net, bizarre contracts with public sector unions that enable them to get 14 months
salary for 12 months work, huge pensions, as the economy slowed down they were faced with much higher unemployment costs and all the things that go
with it. We've seen it in North America, the U.S. and Canada had to take on huge deficits to cover amazing problems in the financial system but also in their
economies. The Greeks did the same thing on a smaller scale, but they had no money to do it.

What are junk bonds?

It's a wonderful term that came out of the late 1980s when Michael Milken created what's known as the junk bond market. These are just bonds rated below
investment grade, which means they have a higher risk than bonds where you're more confident of the future of the issuer. Once that happens, and in fact
it happens before they get downgraded to junk, when they're on the edge of it, a lot of institutions aren't allowed to own them. Major pension funds cannot
own high risk bonds for the most part. The big pension funds we know have to have investment grade bonds to balance out their riskier equity investments
and other things like that. So as long as Greece had an investment grade bond with a nice yield, the Scottish widows and orphans fund, for example, could
buy it. When it's junk, they can't touch it and they're required to sell it, which makes the problems even worse because you have to have more of this stuff
on the market, you have yields rising to exorbitant levels because investors need to be rewarded for the high risk, the market shrinks, in this case the Greek
government can't issue new bonds because it's impossible, the market won't accept them and the Greeks desperately need a handout from the IMF and
their colleagues in the euro zone.

We've heard recently about ratings agencies like S&P and Moody's downgrading other countries such as Spain. What does that mean when a
country gets downgraded?

It means they're no longer as comfortable with the country's debt ratio. The things they measure are the ability of a borrower to repay the bond. That means
that they look at things like revenue sources, economic prospects, debt-to-GDP levels, which are an important indicator, budget deficits, future costs and
future prospects for increasing revenue, i.e. can they raise taxes if they have to, is there an opportunity to make cuts in fiscal spending. Those are the
things they're supposed to evaluate on a regular basis and the ratings are supposed to reflect their view of the prospects of a borrower to repay, so when
they make a cut of any serious amount, (i.e. a cut from triple-a to triple-a-minus is not a major cut -- that just means they’re a little more leery than they
were before), but if they go down a whole letter, from A to B, which happened in the Greek case, that's a serious cut, that means they're convinced the
borrower is no longer as capable of repaying the debt as they thought. It doesn’t mean they won't pay, or that they're about to default, but it means there's a
higher risk of default and you as a lender need to be aware of these things.

The problem with ratings agencies is they often come in after the horse has left the barn to try to close the door. In the case of Greece, the market was
already saying their debt was junk, so coming out with a rating now and saying we're downgrading it to junk doesn't mean much to the market -- they were
already regarding it that way -- they're just matching reality right now.

In the case of Spain, which was downgraded, it's still rated as an investment grade bond. That means institutions can still own it. They may want a better
mix of higher grade bonds in their portfolio, but they don't have to dump the Spanish bonds yet because there's no danger Spain is in danger of defaulting
the way Greece is.

Greece and Spain aren't the only countries with massive debts. Why are a few European countries being treated so differently? what is unique
about their situations?

Every country during this current economic crisis has taken on much larger deficits to cover rising social costs and to try to stimulate their economies. But
other countries with very high debt levels like Italy, for instance, don't have the same exposure in the credit markets. Because they have larger economies,
the French, the Italians and others with high debt levels can mostly finance them on their own. They have taxing capacity, capacity for economic growth
and creditors aren't as exposed in these countries as they are to the smaller ones, where the countries really can’t make the changes they need to quickly
enough to turn things around.

Britain has a very high debt level, but it has its own currency, and it can devalue that currency -- it already has. Once you devalue a currency, your
domestic economy improves because people tend to buy more domestic products and import less. Your export market improves because your costs of
production and exporting go down. Greece and Portugal, which are very small economies, don't have that flexibility because they're tied to the euro, and
they can't devalue their currencies to fix any of this. So they're stuck with a relatively strong currency, which means that they have these imbalances
continuing. Ireland is in the same boat, although it has taken much tougher measures to get its fiscal house in order.

What does all this mean for the strength of the euro currency and its future?

The euro has been coming down in value as investors lose confidence in the region, there's no question about that. But for Greece and the other smaller
southern European countries to benefit, the euro would have to basically plunge to 80 cents (U.S.) and right now its still around $1.30, so you can see the
difference. If Greece still had its own currency, the drachma, it probably wouldn't have got into this pickle in the first place, because the markets would have
told them, you have too much debt, but because it was issuing debt in euros, it never got that signal, the market was perfectly happy with the euro for a
long time as an alternative to the American dollar, because they were worried about American economic prospects, and they needed to balance their
portfolios so they were buying Greek bonds, even as the Greek economy was collapsing.

That wouldn’t' have happened with the drachma so they lose an important signal in the market place that's there if they have their own currency. A slightly
falling euro benefits the strongest economy in the region quite a lot. That's Germany, because it's a huge exporter. But the fall won't be enough to benefit
these smaller countries, and there would be no stomach for a drastically reduced euro because then the Germans and the French could say, well, if we're
only going to have an 80 cent euro, we might be better off going back to our own currencies. A lot of risks are going forward for the euro. It's been
overvalued for a long time, and most analysts say it probably should never have been above $1.20, based on Europe’s economic prospects on its
demographic issues and structural problems.

But the problem is when you have a single currency and 16 separate fiscal policies, you're going to have these issues. They were very lucky for nearly the
first decade of this currency that they didn't have this crisis and that's because they had this booming global market. That's not there now, aand they're
going to have to readjust and that's going to mean further stresses on this particular currency.

Why are investors flocking back to the U.S. dollar?

Because the U.S. dollar for all the problems that the Americans have, remains the safety net of choice. And the first thing investors do when they're worried
about another market or currency is rush to U.S. bonds. The U.S. has never defaulted on a bond in its history, it still has the world's largest economy, it's
recovery is actually stronger than a lot of people thought and when push comes to shove, people still feel safe with those greenbacks. and the fact is that
the Americans have severe fiscal problems, but as long as other people are willing to own their debt, they'll always be able to finance their way out of this
mess and that's something not available to a lot of these sad European countries.

How and why is this crisis spreading to other countries? People are referring to it as a contagion.

They’re even calling it an Ebola virus. It spread because once investors begin to lose confidence, it quickly mushrooms, so for instance, say you're buying
bonds denominated in euros issued by Greece, and you don't want those bonds any more. Then you say, well, if Greece is having this problem, who might
be next?

And clearly the next weakest country in the euro zone is Portugal, so suddenly there's a run against Portugal, and nobody wants Portuguese bonds -- they
don't want to be the last person holding a dicey euro bond, so what do they do? They abandon the weaker bond issuers, and if they still want to hold euro
bonds, they'll go to Germany which is the strongest economy in the region, and they'll buy German bonds. That gives them the euro exposure they might
want in their portfolios without the risk that they perceive. In fact, what has happened is they've even been abandoning those. They’ve been rushing back to
U.S. bonds and moving into Swiss bonds.

These are the traditional safety nets, they've been buying gold again -- that tends to happen, and it's really a crisis of confidence and it's hard to arrest that
crisis without dramatic action and the problem in Europe is that they're been dithering.

It was described by one Greek commentator as the European union pushing the button but knowing it wasn't connected to anything. And what they did was
say to the world, we will make sure Greece is okay, and you don't have to worry -- we’ll put up the money necessary to keep the Greek government afloat,
and by implication pay all its debts to bond holders. Well, if that had worked, the market was saying, great, the money's going to be there, I'm going to keep
buying European bonds... But it didn't work, which means they weren't able to arrest the crisis of confidence by doing nothing, which is what they wanted to
do.

Now they actually have to do something and the bond market looks at this and says, well, they're really not moving very quickly, considering that now I'm
facing junk bonds on one side and devalued bonds from other countries, what is going on? Well, as that process drags on, investors in those bonds say, I
have to get out of this because this is only going to get worse, and if they’re dithering this much about helping Greece, what happens if Spain implodes?
Spain has very high unemployment right now -- they've got a youth unemployment rate that rivals south Africa. What happens if Spain suddenly needs
billions more to keep its social safety net from unravelling? Those bonds are going to end up junk too, so they say, I better sell them now and get into
something safer and that's the contagion, and unless they treat the virus at the source dramatically with really strong medicine, this is what happens.

Is this a rational response by investors?

Well, markets are not rational, and neither are many investors. But it depends. There are people who profit in markets like this. Truly rational people who
weigh the risks very carefully and say, I can get a yield on Spanish bonds, that is just terrific, and my risk might be limited by a hedge I might be doing
somewhere else and that makes for a good investment, but if you have no stomach for that risk, then rationally you should be out of those markets, and
right now, rational investors should not be pouring money into Europe, because the situation is in flux. We don’t know what the solution's going to be and
we don't even know if the solution will be enough to fix the problem. We know the problems are going to get worse, not just for Greece, but for Portugal, for
Italy, for all of the really debt-laden countries and Britain too. Britain has its down currency, so they can do a little more on the monetary side, but their
problems are really severe and you don't see any of the people who are running for office saying we’ve really got to bring in tough, tough austerity
measures to fix this problem and that should worry bond holders, because governments that won't impose austerity are going to be back borrowing more
and more money and that devalues existing debt.

How far could this contagion spread? Could it affect Canada and the U.S.?

We know from our experience with the Asian debt crisis of 1998 that a little problem with the Thai currency set off a massive crisis which spread to Russia
and triggered a major debt default, and that led to the collapse of a huge hedge fund in the United states . That could happen again if there are investors
heavily exposed in these markets, but in terms of the effect on the Canadian economy, the Canadians should be winners from all of this because as
investors look around for safer places to go, and if they're worried at all the soaring U.S. deficit, they’ll say well, what gives me the same kind of safety in an
economy that's sort of tied to the Americans who are recovering without the risk of those big budget deficits, well Canada, Australia, New Zealand, they're
big commodity producers, they're tied to growth buyers of those assets, mainly Brazil and China, they might be the places I want to put my money, so in
fact, Canada could benefit by having cheaper financing as more money pours into the country.

What about the high loonie? Is that better or worse when it comes to this crisis?
The strong loonie is what's attracting all of this capital, but it's terrible for Canadian manufacturers. The government has tried to pretend that we should be
able to live with a strong currency now and it enables companies to make productivity improvements and to buy technology cheaper which is all true, but it
definitely hurts our export markets and we are still heavy exporters. We rely enormously on the U.S. market and the strong dollar doesn't help central
Canada at all. And it doesn't do a whole lot more for our resource producers because they've already been benefiting from the earlier strength in the dollar.
The problem is that as the euro weakens, we’ll see the Canadian dollar and the Australian dollar get even stronger.

You just did some travelling in Europe. Did you get a sense people knew they were in a crisis?

You certainly don't see that crisis mentality in the big capitals, and I was in Paris, London, and Scotland. There's still consumer spending and it’s actually
holding up quite well.

Housing markets in the big cities are still booming, the cost of living in these places is ridiculous... I was looking at apartment prices in London, and they're
still ridiculous. But when you talk to individuals, there's no question there’s deep concern. Unemployment rates are rising, entrepreneurial opportunities are
getting smaller, there's concerns about heavy new taxes that will be needed to bring these deficits under control, because remember it's not just the Greeks
that are required to reduce their deficits. Any country that's over the 3 per cent target set by the European monetary union really has to bring its deficit
down and even Germany is at 3.2 per cent now. That's manageable, obviously, but they're worried about trade within Europe and we have to remember
that Europe itself is the world's second biggest exporter, it's a huge market, and as it slows, it will affect the entire global economy, so those are the risks
and people are aware of that.

And they're certainly worried about it. It's shown up in the election campaign in Britain, and the politicians are talking about spending more money, not less,
which is really worrisome. There's nobody talking about reining in deficits, about bringing government costs down and that's an issue they're going to have
to face, just as the Americans will down the road and that means trouble for future generations.

Everything You Need To Know About The EU Debt Crisis And Why It Matters-A Lot

1. Greece needs to pay off about €20-30 Bln in maturing debt between April and May. They don’t have it. Spain needs a similar amount in July.
Portugal and some others will also need to sell bonds over the coming months.
2. No one wants to pay for Greece and other PIIGS [Portugal, Ireland, Italy, Greece, Spain] mismanagement, corruption, tax dodging, lack of
economic dynamism.
3. However, Everyone is rightly petrified of a Greek default, which would probably scare bond markets so badly that none of the other PIIGS (nor
about 10 other equally distressed economies in the eastern Europe, the ME, Latin America, etc) will be able to sell bonds at affordable rates.
4. THAT CAUSES: an historically unprecedented wave of sovereign defaults by most or all of these countries.
5. THAT CAUSES higher borrowing costs even for the better economies.
6. THAT CAUSES ANOTHER CREDIT FREEZE UP AND MARKET CRASH, PROBABLY WORSE than in the Fall of 2008 following the mere
collapse of Lehman Brothers (one measly big US investment bank), because NOW markets are even more nervous, governments even more
debt burdened from the last round of stimulus and bailouts etc.
7. No EU leaders can volunteer taxpayer funds to bailout PIIGS without committing political suicide, because their own economies and taxpayers
are struggling and the PIIGS do not evoke much sympathy anyway, having done so much to deserve their fate. Nor can PIIGS leader expect to
impose or sustain the draconian spending cuts demanded by the EU over the coming years and expect to survive in power.
8. THEREFORE, the EU and PIIGS leaders best serve their own interests by pretending but failing to achieve a rescue package for Greece, (using
the unstated but clear threat of a global economic crash to extract as much cash from the rest of the world as possible)
9. RESULT: Some kind of international coordinated plan that allows EU leaders a chance to save their careers, or at least, reputations:
1. the EU leaders can contribute taxpayer funds to a bailout but tell their electorates they got the best deal they could and made the best
of bad situation, paid the least, and avoided a financial collapse (at least for now).
2. The PIIGS leaders can impose painful austerity plans and possibly cede control of their economies to international overseers
(demanded by the rescuers to ensure compliance and repayment of funds contributed), thus transferring blame for the local suffering
to international forces beyond their control.

With the above facts in mind, the recent events become clear. They explain:

1. The comic repetitious cycle of EU support pledges for Greece, followed by refusals to offer any actual cash, or even loan guarantees. Illogical on
the surface, but makes perfect sense if the goal is just to pretend to rescue Greece without actually doing so.
2. After months of prideful declarations that the EU could solve its own problems, the sudden admission this past week by Germany that the IMF
should help save Greece (and by implication, the other PIIGS). The IMF is funded internationally, the US being the biggest contributor by far.
While EU leaders may not be able to get away with short term painless money printing, the US sure can.

While the long term best solution might be to suffer the consequences of the defaults and begin anew, the near term economic pain would be bad for the
careers of the current global political leaders, thus they want to avoid that. Politicians tend to choose short term benefits over longer term solutions in order
to defer painful solutions until after their terms in office.

Ramifications

There will be intense pressure to get Greece resolved before July.

The Twin Debt Bombs Due To Detonate In July

The pressure to devise some solution that calms markets is considerable. In July:

Spain Bond Sale

Spain needs to sell about €30 bln in bonds to avoid default. It is in better shape than Greece, but that won’t matter if a Greek default has sent borrowing
rates soaring for its fellow PIIGS block members. That means a Greek default in April or May makes a Spanish one in July far more likely.
US Tidal Wave of Mortgage Rates Resets and Defaults

In the US, July 2010 begins a wave of residential mortgage rates resetting higher on scale not seen since…late 2008 (scene of our last market meltdown).
As the below chart shows, 2009 was a lull in this storm during which rate resets fell to multi-year lows and took some pressure off of mortgage default rates
(which have remained brisk nonetheless).

02 mar 19

Hat Tip to Graham Summers: U.S. Housing: The Big Picture

It’s no accident that the peak in mortgage resets in 2008 occurred around the same time as the last stock market collapse and extensive mortgage write
downs in the banking sector.

Remember what happened to stocks in 2008?

S&P 500 Weekly AVAFX Chart April 2008 – March 2009 04 mar 19

The scale of mortgage resets to occur in 2010-2011 is identical to that of 2007-2008. Stocks are already at 52 week highs and thus have plenty to give
back.

True, conditions aren’t exactly the same. They are much worse.

1. The US economy is weaker, having shed around 10 million jobs since then
2. Financial markets more nervous, as they have seen how quickly a contagion can spread
3. Bank loan portfolios are more damaged, and mask an already massive ‘shadow portfolio’ of loans still carried on the books but in fact needing to
be written off (after the bonuses are paid, off course)
4. The Federal Reserve has already shot most of its bullets. In 2007, the Fed had yet to resort to its unprecedented stimulus package of special
bank borrowing facilities, bailouts, takeover off bad assets, cut interest rates from 5.25% to 0.25% (from September ’07 until now), taken over
AIG for $85 billion (September ’08, and later another $40 bln given), initiated TARP for $700 Billion, bought close to $2 trillion in assorted US
Treasuries, agency mortgage backed securities and debt (March 2009-forward)

How To Profit

One way or another, there will be more money printing, by most or all major central banks. That means:

1. Long Term: further feeding long term inflationary pressures and the bull market in commodities, especially the preferred USD hedges, gold and
oil, and other hard assets.
2. For the rest of 2010, the fear and uncertainty should continue to favor the US Dollar and other safe haven assets, as Greece, Spain, other PIIGS
debt sales, and the US mortgage resets all pressure markets lower, especially as we get deeper into the second half of 2010 around July.