Greece Exits the Euro

http://www.bbc.co.uk/news/business-18074674

Very nice summary of the impact. Just click on the different icons.

Now think for a moment.. Put yourself in the same situation.

If you are a Greek with money in the bank, when you hear talks about Greece exiting Euro, what would you do?

This is a death spiral..  Talks like this will just forced more people with the means to draw money from the bank and moved it somewhere else. The 1st stage of panic is already set... Mayhem cometh... sooner or later..

If you are one of the banks in Euro supporting the Greeks and other european nations' debt.. what do you think.. your shareholders and others might start dumping the shares in anticipation of the mayhem.. this is the 2nd stage..

If you are one of the other countries with similar debt problem as greece, what will your stakeholders think when they see 1st and 2nd stage happening... They will stop lending too..

Onlookers from around the world.. comes next.. they will start examining any linkages to the Europeans (good or bad) and may do the same.. Dump first..question later. Remember Lehman & Bear Sterns? Local banks were reported to have some linkage to them in 2008 and almost immediately, you can feel the fear in the market even though alot of companies are not directly related to the loans.

Optimal Leveraged not Over-leveraged

Image via Wikipedia If you looked at most of the recent financial crisis (LTCM, Asian Financial Crisis, Subprime), they were all started because of shaken confidence in the financial system. What followed were the credit problems appearing as companies or individuals who over-leveraged began having problem servicing their loan repayment obligation. Firms/individuals who have strong cashflow/income ability were able to survive but there were also numerous cases of bankruptcies or firesales for entities with weak cashflow.

Recently, Peace Mark of HK over-leveraged by pledging their shares in Sincere Watch to get a bridging loan to finance its takeover of Sincere Watch. No doubt the payoff would be great if it was done successfully. However, there were doubts over its ability to service the loans and since then, several banks have applied for a provisional liquidator to restructure the company with an objective to fufil Peace Mark's financial obligation to the creditors.

For individual investors, we hear cases of investors over-leveraging especially on property purchases as property loans are the easiest to obtain and most leveraged at 80% of property value. In good times, you would no doubt be rewarded as rising property prices will magnify your gains. However, when you are caught off-guard by the turn of economic events. You will be stuck with the financial obligations with the bank and might need to suffer huge losses if you do not have the cashflow to service the repayments.

What is an optimal level of leverage then?

The optimal leverage is to always assume a worst case scenario in your leveraged investments and determine whether you have the financial ability to service the repayments. In the case of property, the more prudent means might be your ability to service the repayments with your current income for a year if the rent income is not available for 1 full year.

So, as investors, we need to always keep in mind that while leverage is a good tool to accumulate more wealth, it can also destroy wealth fast. What we need to aim for then is to have an optimal level of leverage. No leverage is the safest but you will not be as effective in creating wealth as a investor who is leveraged prudently.

In my case, the investment portfolio generates dividends & bond payments and I used re-invest a percentage of it into my investment portfolio and another portion to service repayment of leveraged investments in properties.