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 IHA Monthly   
May, 2012  
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History Speaks
Capital Flight a la Francaise
Sure the recent Greek election didn't produce a government but the biggest surprise was the second place showing by the Coalition of the Radical Left (SYRIZA) party. This has heightened the probability of Greece leaving the Euro and resulted in over $1 billion being pulled out of Greek banks this week as savers fear their money will be converted to devalued drachmas. Europe is no stranger to capital flight- even in 'core' nations such as France. In the midst of the Great Depression in 1936 France elected their first socialist led government, the Popular Front, headed by Leon Blum. The Popular Front instituted a number of changes desired by the left wing of the time, including raising wages and limiting the work week to 40 hours. Driven partly by fear of Blum's intentions toward the wealthy as well as rising French deficits, there was wide scale flight of capital out of France, led by the banking house of Lazard Freres. The strains this put on the banking and money markets in France forced Prime Minister Blum to devalue the franc by 30% in September, 1936 and the government dissolved within a year. For those wealthy French who moved their money to London and New York before the devaluation the result was a 43% gain, in franc terms, when the money was repatriated to France. We doubt that was the intention of PM Blum and his Popular Front but is undoubtedly on the minds of those pulling their Euros out of Greek banks right now.
Market Commentary

InnerHarbor Advisors is a Manhattan based financial advisory firm specializing in: Financial Planning - Wealth Management - Insurance 
If you would like a fresh perspective on your finances, please contact John O'Meara or Michael Keating at 212.949.0494 ...or simply 'reply' to this email.


Issues around Greece are dominating markets again. Recent elections were unable to produce a government and new elections are scheduled for June 17th and the Coalition for the Radical Left (SPIVA) leads in most polls. SPIVA advocates tearing up the agreement signed between the Greek government and the EU, IMF and ECB that traded fiscal austerity in return for funds that to keep the government operating and recapitalize the Greek banking system. SPIVA would like those funds (and more) without strings attached. Their strategy appears to rest on a gamble that Eurozone countries desire Greece remain in the union above all else... and will blink in the 11th hour, handing over the aid. We find this tactic reminiscent of Sheriff Bart in 'Blazing Saddles' holding himself hostage to stop the townspeople from hanging him. As the Euro-crisis has dragged on it is easy to forget exactly how much of an outlier Greece is, economically speaking. As a refresher, here are some graphs of the economics of the Euro area countries from

Debt to GDP


Budget Deficit


Current Account  


 GDP growth (through Q4 2011)


Greece is either worst or second worst in all these fundamental measures, ofttimes by a long shot. In almost every way the Eurozone would be better off if it didn't include Greece in the first place.

We think that the Greek departure from the Euro was inevitable from the moment their real debt figures came to light as the amount they owed could not be paid back. Particularly not while in the straight jacket of the Euro currency and amidst fiscal austerity. The real threat Greece has posed is twofold. The first is to the European financial system via banks with exposure to Greek debt and the second is contagion to other peripheral Euro nations. However, the time Greece posed the greatest threat to the wider European financial system was the day that real debt amount was revealed. Since that time, anybody with exposure to Greece has had years to either dispose, mitigate or prepare for the worst case scenario of Greece leaving the Euro. After the 50% haircut already imposed upon the private sector holders of Greek debt last year, the direct affect of leaving now would be minimal on the private banking institutions. The ECB would take losses but they are more than manageable considering the size of its balance sheet. The threat of a contagion to the debts of other European peripheral nation's debt is real. There are already reports of bank runs in Spain. But if you accept that Greece was destined to default, then logically that threat has to be faced at some point. Eventually, the northern Eurozone nations were going to have to commit massive financial resources in order to retain the Euro currency. This could be either through direct aid, or we think more likely, the ECB pumping massive liquidity into the banking system.

The choice for Greece will be between a relatively orderly withdrawal from the Euro or a messy one. While the cost of a messy withdrawal will be steep to the rest of the world it will be infinitely worse for Greece. They would be looking at massive inflation due to a worthless currency, a big drop in GDP and pariah status among international financial institutions and their European neighbors. A more orderly withdrawal will allow them to continue to receive aid of some sort from the EU while helping limit the damage to the rest of the continent.

Properly managed, dropping the Euro and adopting a devalued drachma is the quickest path for Greece to return to competitiveness and growth. The real question is that is that it has been so long since the Greeks managed any fiscal matter properly, is it reasonable to expect they might now? We hope that logic prevails despite the brinksmanship rhetoric being espoused in Greece today.



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Asset Class Returns

Through April 30th - Monthly and 52 week returns for major asset classes. Performance information is for total return assuming reinvestment of interest and dividends. It excludes management fees, transaction costs and expenses. 


Greece dominated headlines again as elections there failed to produce a government but bolstered anti-austerity parties. U.S, foreign and emerging stock markets were all down, particularly periphery European countries. The return of the 'risk-off' trade meant money flowing into bonds and yields were lower across the board, particularly in the safe haven, sovereign names. The U.S. 10 year is down to 1.75% and the German 10 year bund is below 1.5%.

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Financial Planning Highlight


I can give how much?!?


We take a look at 'giving' in this month's Financial Planning segment and urge you to consult your estate planning attorney before doing so. With disclosure out of the way let's take a look...


Until the end of 2012, you can give or receive (depending on your vantage point) a $5 million gift without federal gift tax consequences. The federal lifetime gift tax exemption amount is actually $5.12 million, as adjusted for inflation- but is set to revert to $1 million at the stroke of midnight Jan 1, 2013. 


In recent history, the estate tax exemption amount has been higher than gift tax... meaning a person could effectively give away more after they die than while still living. With the gift tax exemption now on par with estate tax, that same individual has an opportunity to see the benefits of his or her gift in their lifetime. 


There are a few reasons to consider giving while alive. The first is the possibility that the estate tax exemption might be much lower after this year. It may seem unlikely to go back to $1 million but remember the zero estate tax in 2010 was considered a fantasy, too. Secondly, many states including New York have lower estate tax exemptions than the federal code but no gift tax. So taking advantage of the federal gift exemption could help limit state estate taxes. Finally, it gives greater contol to the giver in terms of what is given to whom and, if properly constructed, even of the gifted assets.


Lawmakers have six months -not including their summer recess- to clear up this issue and a full slate of other issues. Recently estate attorney Steve Schanker reminded us that Congress has been unable to "compromise or communicate" on any matter- including this one and it's not unreasonable to expect this behavior will continue past November's election. What happens after 2012 is anyone's guess.


We thank-you for reading,


John O'Meara, CFP, MS
Michael Keating, CFP



As always, we welcome your comments on style and content.


Mike and John InnerHarbor Advisors 

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212-949-0494 and