The first bailout was easy with little conditions. But the second bailout today cost every party involved huge sacrifices.

• Greeks had to lower minimum wages, reduce pensions, layoff government jobs, and reduce social programs across the country.
• Greek bond investors had to take a 70% loss and forced to take a low 2% interest rate.
• And the IMF to increase their exposure to Greek debt and the risk that Greece may still not be able to repay after all the tough austerity measures.

Even with all the debt reduction and forgiveness Greece debt totals are still over 100% of GDP. A ratio over 100% means a major debt burden for its people and financial instability. With a best case scenario forecast by the IMF with the recent bailout and austerity measures Greece may hit 120% of GDP for 2020. For the past 3 years Greece’s GDP has been shrinking but only if 2012 can come a positive year then the forecasts has a chance of holding truth, otherwise if GDP shrinks anymore for the next 2 years all the numbers are wrong and another bailout will be needed again.

Whats next?

Greece has set the precedence for other EuroZone countries (think Portugal, Spain, and Italy) that may require bailouts to ask for the same debt reduction and forgiveness measures from bond investors. As an investor being forced to take a 70% loss doesn’t scare you away, there is no good reason to invest into these risky countries when other more stable countries have better terms and pay better interest rates. That leaves the only major buyer of EuroZone government bonds to be other foreign governments and the IMF. Its nothing more than a hot potato being passed around and the hope is the music doesn’t stop when the hot potato is sitting in your lap; otherwise there will be some major financial burns.

Europe may have saved themselves for now, but we believe we should be seeing another bailout before 2012 is over.

As with the extreme news all global markets have also acted to extremes with daily price swings of 1% to 4%. This seems to be the new ‘normal’.

Gone are the days where you can go on vacation, feel refreshed, and not to worry that the markets have only fluctuated in a 3% range within 2-weeks. Traders and anyone who has a lot invested in stocks should be afraid to even take their eyes off the market for 1 day; because a 2-week move swing can be as much as 15% in any direction in 2011.

Greece is the immediate problem that needs to be fixed, but following closely behind are a sloth of other countries being downgraded recently like Spain, Portugal, Italy, and USA. Each have a huge deficit that needs to be addressed and the trend is to cut government costs, raise taxes, and some cases to reduce pensions & health care.

Greece is the debt-alarm-bell that has sounded and others are hoping to avoid the same fate. Politicians are now finally trying to be fiscally prudent. We believe some countries would be able to make a successful turn-around like the USA (if they really really try), but in our opinion Italy and Spain are strained by overly generous government subsidies and pensions which are hard to cut as people are accustomed to it for decades already.

How far a country is willing to fix their deficits depends on their citizens and a willing level of sacrifice. There is only so much milk you can take from a cow without giving something back to feed it. Hopefully people will realize the government cash cow can run out of cash one day… and that day may come sooner than most think if it is overly abused.

The US was warned back in April 2011 that if they didn’t act properly to tackle their debt problem in a carefully planned manner, rating agencies like Moody’s and Standard & Poors (S&P), will downgrade their credit ratings. US politicians probably didn’t believe the downgrade will happen since the US is regarded as the safest place on earth to be invested in. The politicians bickered for months until the last date before the August 2nd, 2011 budget deadline and came up with a watered-down deficit cutting budget that was less than satisfactory. (It was expected the US can cut at least $4 trillion in debt, but the agreed budget was only a cut of $2.1 trillion).

S&P followed through with their downgrade evening of Friday August 5th and it appears that rumors leaked out early on Thursday August 4th creating a +500 point decline in the DOW market index. The US government has quickly responded by allowing banks and financial companies to keep holding US bonds without more cash collateral. (Anything less than AAA credit-worthy bond investments are valued at a discount).

The USA now with AA+ ranks the same ratings as Belgium, Hong Kong, South Korea, and New Zealand. It is still a very prestigious rating and we believe that the downgrade is just a warning to have the US politicians to get their house organized.

A total of 40% of Greece's employed workforce works for a government related agency. Not only are the benefits rich, pensions generous, and working hours short; many of the current workers are rioting against cuts of more than 4% of any benefits. The labour unions know and acknowledge the Greek government will default on the national debt if austerity measures are not met according to the European Union bailout conditions.

Through out the past 3 decades Greece is well known for its outspoken citizens who will strike and riot to get their point across; and with success every time. These demands were often granted because the Greek government and politicians at that time held the power to do so.

Today the power goes to the International Monetary Fund (IMF) and European Union (EU) who grants the bailouts to EU members who are about to default. The IMF and EU have no conflict of interest as the politicians who want votes to be re-elected. Therefore, the Greeks have gone all out on riots and sometimes in a destructive manner.

Other EU members who have to pay for the bailout are losing patience with Greece’s behaviour and slow paced action plans. The tension is intense and there could very well be a deep catastrophic financial crisis if Greek truly defaults and the debts have to be written off by banks and investors.

It will definitely be a historical event if a default happens, and this can turn out to be a huge financial disaster. If Lehman was only a large investment bank and it caused a financial crisis already, think about what Greece’s impact would be for Europe.

In the USA, decades of political promises have compounded the national debt to over $14 trillion. Generous pensions, medical subsidies, and more recently long unemployment benefits have squeezed government budgets to record high levels.

State and local city governments are in the most trouble as their power to issue bonds is harder than at federal levels. Ohio, Florida, Michigan, and California have already voiced they desperately need a federal bailout for more money, but this time their calls may not be answered. The Feds have their own set of budget problems to deal with and there might not be enough money to go around this time.

States have now started to finally tell their people budget cuts must be done otherwise there is a real risk of bankruptcy. But those who work for governments, public unions, and those on pensions who had it good for many years continue to refuse to make cuts. They maintain the government must keep their promises no matter what.

Others who work in the private sector often have to pay much higher medical costs, get fewer benefits, and often don’t have employer pensions. The recession has caused even greater disparity as layoffs and deeper employee benefit cuts have taken a toll in the private sector, but public employees were left untouched. Governments are using this fact as a means to reduce benefits to public employees and at the same time try to lower the deficit.

In Wisconsin, senator Scott Walker is the first to cut public union benefits and bargaining powers. The motion has caused more than 64,000 people to protest for 8 days in the state capitol. The bill has almost passed and if it does this may lead other states to do the same, but the people will not give in without a fight. It’s predicted if many other states follow there may be major civil unrest.

Although it is a tough choice, but it is the right choice. If deficits keep ballooning, we have already seen the example of what happened with Greece and Ireland where public and private benefits were totally out of line. There is still room for the great US of A to stop this train from falling off the edge, and this may be the time to do so.

This is the second round of QE (or QE2) and the USD$ is now starting to see cracks in the confidence of its currency. With QE2 that means the government could open way to QE3, QE4, or more. World leaders are worried since many countries peg their currency to the USD$ and more importantly they hold a lot of US bonds which decrease in value every time more QE happens.

Inflation is another huge concern. We have seen prices of raw materials rise rapidly over the past 2 years. Oil, gold, copper, food prices have all gone up. The problem is all global trading of commodities are majority based in USD$, so a devalued dollar means it takes more money to buy the same items.

Further USD$ devaluation can happen if other countries lose confidence and starts selling US bonds. Currently, China has the most at more than $1 trillion of US bonds. They won’t be selling anytime soon because they’ll lose out on any devaluation and the Yuan$ is pegged to the USD$. China doesn’t want their currency to rise because they want to keep competitive as an exporting country. China depends on a cheap Yuan$ to prosper.

Fortunately for now most of the G20 countries have their own problems too. Therefore, nobody is criticizing anyone harshly yet. Once global economies improve we will definitely see conflicts with the USD$.

Now in 2010, its not companies needing bailouts, it is countries! Greece, Portugal and Hungary are widely viewed to default within 5 years if they continue as free-spending countries. Its not that they don’t want to cut back… but politics and strong public unions won’t compromise on budget cuts which are increasing the deficits to unsustainable levels. Investors are not buying these bonds anymore (they’re not funding the deficits) because there is a real risk they won’t get their money back.

There are talks of a EuroZone bailout for these countries but we think it will not happen. We can see every developed country is running deficits. Governments, economists, bankers and even citizens know that these deficits are near impossible to repay, so default is almost a certainty for everyone but the question is when. So every country knows if they lend money to another country they won’t ever get the money back, that’s why we believe the government bailouts will not happen.

The next few months we see the markets being very volatile over the uncertainty of possible EuroZone members defaulting. If so, we believe markets may see the lows again of 2009; but if there are no defaults we anticipate global growth to be minimal due to drastic government spending cuts in order to avoid default so markets may swing sideways for and extended time.