At Last, a Greek Debt Deal

A look at the winners, losers & terms.

It looks like Greece will stay in the euro. After eurozone finance ministers pulled an all-nighter, negotiating for 17 hours into early Monday morning, the government of the beleaguered nation accepted the latest bailout terms offered by its creditors. The deal was unanimously approved by the eurozone’s 19 member countries.1

This third bailout agreement contains the harshest austerity measures yet. There was no debt haircut for Greece, and this latest round of relief comes at a remarkable price. In exchange for another $95 billion worth of aid over the next three years, Greece agreed to more than just sales tax hikes and cuts in pension payments – it also agreed to sell off state assets.1

To explain this a bit further, Greece will transfer about $50 billion worth of “valuable” assets into a “guarantee fund”. (This was Germany’s idea.) These assets – likely bank shares that the Greek government will buy up with bailout money in order to recapitalize its banks – will be used as collateral on the latest bailout package. The mission is to sell them in reasonable time, with half the cash going toward repayment of the bailout funds, a quarter toward investment, and another quarter applied to Greece’s national debt.2,3

This yet-to-be-named privatization fund will be based in Greece and run by Greek authorities, but Greece’s creditors will supervise its actions. Greece might have until the mid-2020s (or longer) to sell these assets, as the new bailout loans may have long maturities.3

In the words of French President Francois Hollande, Europe had “a good night, and a good day” – and no Grexit. Who won and lost most in this new deal? 1

The winner: Angela Merkel. Germany is the premier economy in the eurozone and Greece’s biggest creditor, and its chancellor decided enough was enough. Merkel took a very hard line in the negotiations; in fact, Germany, along with Finland, ardently supported throwing Greece out of the eurozone and letting the country take care of its financial problems without any further loans.1,4

Merkel looks very good even after Germany’s apparent conciliation to the pleas of France, Italy and other European Union members that argued for the necessity of a third Greek bailout. As she commented, “The advantages [of the deal] far outweigh the disadvantages.”2

The loser: Alexis Tsipras. Tsipras and his left-wing Syriza party have all but written themselves out of Greece’s future. After disparaging the austerity measures Greeks live with and praising the Greek people for the “very brave choice” they made in voting against another bailout, Tsipras signed off on austerity cuts that were even deeper.

In the end, he simply had to; for all his posturing, two financial shocks would have occurred if he had refused. Without a deal in place, Greece’s banking system could have collapsed this week. Greece also could have found itself out of the eurozone – a danger signal for institutional and retail investors.

Global markets started the week with a relief rally. Monday’s trading day found the Dow, Nasdaq and S&P 500 all rising 1.1% or higher; the STOXX Europe 600, FTSE 100 and Nikkei 225 were also up from 1.0-2.0%. The deal is not set in stone yet – eurozone parliaments must approve it – but the accord just reached relieves much uncertainty.5

Citations.

1 – usatoday.com/story/money/2015/07/13/greek-bailout-talks/30068857/ [7/13/15]

2 – time.com/3955221/greece-bailout-marathon/ [7/13/15]

3 – blogs.wsj.com/briefly/2015/07/13/how-will-the-greek-privatization-work-the-short-answer/ [7/13/15]

4 – reuters.com/article/2015/07/06/us-eurozone-greece-idUSKBN0P40EO20150706 [7/6/15]

5 – markets.wsj.com/us [7/13/15]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Albert Aizin, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, Alcatel-Lucent, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Verizon, Merck, Pfizer, Bank of America or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Albert Aizin is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.

Taking a Loan from Your Retirement Plan = Bad Idea

Why you should refrain from making this move.

Thinking about borrowing money from your 401(k), 403(b), or 457 account? Think twice about that, because these loans are not only risky but injurious to your retirement planning.

A loan of this kind damages your retirement savings prospects. A 401(k), 403(b), or 457 should never be viewed like a savings or checking account. When you withdraw from a bank account, you pull out cash. When you take a loan from your workplace retirement plan, you sell shares of your investments to generate cash. You buy back investment shares as you repay the loan.

So in borrowing from a 401(k), 403(b), or 457, you siphon down your invested retirement assets, leaving a smaller account balance that experiences a smaller degree of compounding. In repaying the loan, you will likely repurchase investment shares at higher prices than in the past – in other words, you will be buying high. None of this makes financial sense.1

Most plans charge a $75 origination fee for a loan, and of course they charge interest – often around 5%. The interest paid will eventually return to your account, but that interest still represents money that could have remained in the account and remained invested.1

Your contributions to the plan may be halted. Some workplace retirement plans suspend regular employee salary deferrals when a loan is taken. They can resume when you settle the loan.1

Your take-home pay may be docked. Most loans from 401(k), 403(b), and 457 plans are repaid incrementally – the plan subtracts X dollars from your paycheck, month after month, until the amount borrowed is fully restored.1

If you leave your job, you will quickly have to pay 100% of your loan back. This applies if you quit; it applies if you are laid off or fired. You will have 30-60 days (per the terms of the plan) to repay the loan in full, with interest.2

If you are younger than age 59½ and fail to pay the full amount of the loan back, the IRS will characterize any amount not repaid as a premature distribution from a retirement plan – taxable income that is also subject to an early withdrawal penalty.1,2

Even if you have great job security, the loan will probably have to be repaid in full within five years. Most workplace retirement plans set such terms. If the terms are not met, then the unpaid balance becomes a taxable distribution with possible penalties (assuming you will not turn 59½ in the year in which repayment is due). If you default on the loan, the retirement plan may bar you from making future contributions.1

Would you like to be taxed twice? When you borrow from an employee retirement plan, you invite that prospect. One, you will be repaying your loan with after-tax dollars. Two, those dollars will be taxed again when you withdraw them for retirement (unless your plan offers you a Roth option).1

Why go into debt to pay off debt? If you borrow from your retirement plan, you will be assuming one debt to pay off another. It is better to go to a reputable lender for a personal loan; borrowing cash has fewer potential drawbacks.

You should never confuse your retirement plan with a bank account. Some employees seem to do just that – in 2013, Fidelity researched participants in its retirement plans and found that 66% of those who had borrowed from 401(k)s had done so more than once. No doubt they became acquainted with the above dilemmas in the process.1

In a recent TIAA-CREF survey, 44% of those who had taken loans from their 401(k) plans said they regretted doing so. Why risk joining their ranks? Look elsewhere for money in a crisis, and borrow from your employer-sponsored retirement plan only as a last resort.2

Citations.

1 – cnbc.com/id/101848407 [9/14/14]

2 – mainstreet.com/article/why-you-cant-borrow-your-401k-and-only-way-you-should [7/24/14]

This material was prepared by Peter Montoya Inc, and does not necessarily represent the views of Albert Aizin, and The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

The Retirement Group is not affiliated with nor endorsed by fidelity.com, netbenefits.fidelity.com, hewitt.com, resources.hewitt.com, access.att.com, ING Retirement, AT&T, Bank of America, Qwest, Chevron, ExxonMobil, Hughes, Northrop Grumman, Raytheon, Glaxosmithkline, Merck, Pfizer, Verizon, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.

Albert Aizin is a Representative with FSC Securities and may be reached at http://www.theretirementgroup.com.