What does the Greek debt crisis mean for investors?
What has happened?
It’s déjà vu for investors as the birthplace of Western civilization, Greece, once again teeters on the edge of economic collapse.
It marks the latest in an ongoing series of crises for the country after major debt restructuring packages were struck in 2010 and 2012.
But with negotiations between Greece and its creditors breaking down, markets have declined amid concerns of a potential Greek default. However, it’s important to keep the situation in context.
“We will respect the decision of the Greek people, whatever it may be.” Greek Prime Minister Alexis Tsipras.
The size of the $US240 billion Greek economy is about half the size of the New South Wales economy. Greece owes creditors approximately $US350 billion.
By comparison, total US national debt currently stands at approximately $US18.6 trillion.
Possible macro-economic impact
European institutions and countries may prove they are able to absorb the losses of a Greek default, although Greek citizens would have to bear the brunt of a failed economy and potential exit from the European Union.
Markets around the world are inter-connected, so concerns lingers about the potential knock-on effects if Greece leaves the EU, with some commentators wondering whether other struggling countries could follow, prompting further losses and destabilizing in Europe. The ongoing uncertainty has prompted a new round of market volatility and uncertainty.
Key Points: The Greek Crisis
• Greece’s current bail-out program, last negotiated in 2012, expired on June 30.
• Greek Prime Minister, Alexis Tsipras, walked away from negotiations with the European Commission and instead called a referendum for July 5 to let the people decide.
• The Greek stock exchange and banks have been shut with ATM withdrawals limited to 60 euros a day.
• While Tsipras supports a ‘no’ vote to use as a bargaining chip at the negotiating table, European leaders have warned it would likely lead to Greece’s exit from the EU.
How will this affect my investment portfolio?
The Greek referendum announcement surprised investors, prompting a decline in the value of the Australian and New Zealand share markets. Meanwhile, Australian, New Zealand and US bond yields – typically a safe haven for investors – also weakened.
This response is reasonable: markets are expected to become more volatile when the outlook becomes uncertain.
“The confidence effect of a deal, the predictability it would bring, together with the injection of liquidity into the economy from disbursements will restore job creation and growth.” European Commission President Jean-Claude Juncker.
What should I do?
“The IMF also will continue to carefully monitor developments in Greece and other countries in the vicinity and stands ready to provide assistance as needed.” IMF Managing Director Christine Lagarde.
While an increase in short-term volatility is to be expected, it’s important to remain focused on your medium-to-long term investment goals during times of uncertainty.