Picture Greece and Germany as two neighbours. They live on a leafy residential street in Toronto’s Beaches area. Germany has made some improvements to its home. They have high efficiency windows, rooftop solar panels, and a rain barrel. The German’s leave for work each day at 6am and don’t return until after dark. Despite this full schedule, they even managed to set up a neighbourhood committee with some of the other neighbours – something like the EU.

The Greek house, by contrast, is starting to show its age. It certainly isn’t up to the standards of the neighbours. The Greeks are still asleep when the Germans leave for work, but they are always home when their hardworking neighbours return, smiling and offering a glass of wine.

Finally noticing that the Greek home is in dire need of repair, the German house prompts the Neighbourhood Committee to lend the Greeks some money. They stipulate that the money be used to clean up the lawn and spruce up the exterior of the house – those things which will most increase the overall value of the street. The Greeks agree and take the money. They cut the grass, but then decide some new furniture would be a better use of funds, as well as a backyard pool to throw a great party.

Unfortunately, the Greeks can’t exactly pay back all of the money they borrowed. Their home improvements didn’t increase their property value nearly as much as expected. Once the neighbours realize this, it’s too late. The Neighbourhood Committee decides to sit the Greeks down and tell them how best to get out of the debt problem. Close the pool, no more parties, get up earlier and go back to work and, most importantly, don’t spend any more money. The Greek house squeamishly agrees to live this way for a little while, but soon relapses to its old ways. The Neighbourhood Committee reconvenes…

Now, a few key indicators:

Bond yields on 5 year Government of Canada Bonds (the basis for 5 year fixed rate mortgage pricing) are at 0.81%. They were here back in April of 2015, but look to be trending lower still.

Have a look here. Canada has its own problems: an overreliance on oil, a heated real estate market and our proximity to the still unsure Americans leaves us little wiggle room should the Euro really start to sour.

For an equivalent indicator in the States we can look at their 10 year treasury yields. Have a look at them here. US Treasuries have been rising on widespread expectations that the Federal Reserve will need to increase interest rates fairly soon. This will likely further weaken the Canadian dollar.

Finally, few economists foresee a scenario in which Canada increases its overnight lending rate this
year or next. In fact, some are even predicting that the Bank will cut the overnight rate once more. The next meeting of the Bank of Canada will be on July 15th, at which point we should receive more insight from our central bank as to what it perceives to be the major factors affecting our country’s growth.

Now, a little bit about Greece:

Greece was a member of the European Union long before the single currency was introduced in 1999.

When the Euro came to Greece, everything became more expensive. Consumer goods shot up in price, but at the same time the country’s economy seemed to be expanding. Euro denominated debt was much cheaper for the Greeks to access as it was backed by the risk free guarantee of the German Government. So naturally, the Greeks started to borrow more. They borrowed for expanded public programmes; they borrowed for more aggressive defense programs; they borrowed to build subways and even stadiums in which to host the 2004 Olympics. In fact, 2004 was a real high point for Greece. In July they won the Euro Cup, and in August they hosted the Olympics – not bad for a country of 11 million souls.

For further perspective, note that in July of 2004 the Athens Stock Exchange had reached close to 2400 and was beginning a bull run that would take it well over 5000 by November 2007. That would have been the time to sell. Today the ASE sits at a lowly 797, and even then only because it’s been closed. If it were allowed to be traded right now, it would likely be at least 20% less.

So what happens next?

On Sunday the Greek government will hold an economic Referendum. They’ll ask citizens to decide whether or not Greece should accept the terms that were outlined by the European Union and the IMF.

A yes vote will mean more of the same suffering Greece has endured for the past five years. A brain drain coupled with sky-high youth unemployment, an economy tenuously propped up by tourism, and the harsh provisions of the bail-out package offered by its creditors.

A No vote will lead Greece in one of two directions. Greece could exit the Euro, return to the Drachma and likely see a far worse future than it would under the current bondage/bail-out program outlined by the EU. Or it could send a strong message to the EU and IMF: that Greece simply cannot support the debt they’ve taken on, and a significant write-down must take place.

There are many challenges in such a high stakes game. The negotiating parties are no push overs. The IMF, the European Central Bank, the European Commission and Angela Merkel are not used to hearing “no”. Merkel has been in power for over 10 years and flaunts a strong approval rating in Germany. The communication breakdown between Greece and its creditors leading up to this vote must also be taken into consideration when evaluating how the EU will respond to a No vote from the Greeks. Will the European Union and the IMF act hastily to eject the Greeks from the Eurozone and push them further toward the left, and toward the east? Or will they anchor themselves to the belief that a Europe with Greece, despite its myriad problems, is still better than Europe sans Greece.

Greece is currently on the hook for 300 Billion Euros. US wiretaps reveal that the IMF and Angela Merkel have known for some time that this amount of debt is unsustainable. Here is the NSA brief on that point. This debt, however, is quite important to the EU. It’s a means of controlling Greek domestic policy, ensuring that the EU ultimately manages Greece’s future spending.

But, haven’t the horses already left the barn? The situation is akin to a mortgage lender asking to come into your house and manage your monthly budget after they’ve realized there is no way you will ever repay your mortgage. Perhaps, going forward, the analysis of what a borrower can afford should be done before the loan is granted.
A modest proposal…

Over the past few days Syntagma Square in Athens has seen each political party congregate to express its views. From my hotel balcony I’ve watched politicians of all stripes speak on what they believe is best for their country. This evening the Prime Minister will be speaking. I believe that this show of democracy, of collective expression and shared decision making, should be both embraced and nurtured around the world.

If the banks here run out of money, which could well happen in a few weeks, the Greeks will be forced to move over to a new currency.  What will that look like, for them and for us?

For Canadians and our mortgages it means Variable is still the way to go. After all, the debt issues Greece faces are not that dissimilar to debt scenarios around the world. They’re just the worst of the lot. So Greece is one of many points of uncertainty in the market. Asset prices around the world are at all time highs – look no further than the current value of your home. Global markets are responding to the inkling that the US might increase rates, and the consensus is they don’t like it. After all, no country is an island – not Greece, not America, and not Canada. In other words, are low rates the new normal?