A few days ago, I sent you
some information on the recent Greek debt crisis—specifically, what caused it
and why it matters. I also mentioned
that the Greek government decided to hold a referendum on whether to impose new
austerity measures in exchange for another bailout. To quote myself:
Why is Greece back in the
news again? Because Greece has finally
defaulted on its debt. Recently, the
Greek government announced it would not be able to make a scheduled debt payment
of $1.6 billion to the International Monetary Fund. In addition, Greece will probably soon
default on many of its other obligations, both to bond holders and the European
Central Bank. Essentially, it’s the same plot all over again with a similar script. Greece has asked Europe for another
bailout. Greek’s creditors have
responded by saying, “Maybe, but you’ll have to accept some extremely tough
terms in exchange.” (In other words,
more austerity.)
The difference this time is
that the Greek government seems unwilling to make that exchange. Mr. Tsipras, the Greek Prime Minister,
announced a nation-wide YES/NO referendum to be held on July 5, where citizens
could vote whether to accept more austerity measures. A YES vote would mean more austerity in
exchange for another potential bailout.
A NO vote would mean Greece decides to call Europe’s bluff, bargaining
the EU will continue to provide financial assistance anyway. Well, the
referendum has come and gone, and the final results are in. 61.3% of voters chose the “NO” option.1 So
you may be asking yourself: “What does a NO vote mean, exactly?”
The referendum itself was
largely symbolic, because the bailout terms Greece was voting on had already
expired. Still, symbols are
important. In this case, the results
indicate Greece has decided to reject the kind of austerity measures they’ve
been subjected to over the past few years.
That means any negotiations between the Greek government and its
creditors will have to start from square one.
Meanwhile, the clock is
ticking. Remember, if Greece continues
to default on its loans, the threat of bankruptcy will likely become
reality. That in turn may have a drastic
effect on the overall European economy.
Other than the referendum,
though, not much has changed since my last message. As of this writing, the markets have dipped
but not plummeted, mainly due to uncertainty over what might happen next. The Dow fell 46.53 by the close on Monday,
while the S&P fell 8.02.2
In the meantime, Greek banks
are still closed while Prime Minister Alexis Tsipras decides on how to
negotiate with creditors moving forward. In addition, Europe’s financial
leaders are holding meetings amongst themselves to determine their next
offer. Both parties are hoping to strike
a deal before the end of the month, when Greece owes 3.5 billion Euros to the
European Central Bank. If Greece
defaults on that payment, then things get really interesting. To quote myself again:
So what happens next? What will this drama lead to? The answer to
the first question is simply, “No one knows.”
As for what it will lead to, here’s the worst case scenario. Let’s say Greece and its creditors don’t come
to a new agreement. If Greece goes into
bankruptcy, that will raise the possibility of “financial contagion” throughout
Europe. It could even lead to Greece
leaving the European Union, which could cause an even greater shock to the
European economy. In short, many experts
are worried about a potential domino effect.
If Greece goes into default, it could start a chain reaction that damages
the entire continent. But here’s the good news: Europe is in a stronger
position than it was several years ago, and is better equipped to prevent
financial contagion. Then too, Greece
makes up a relatively small part of the Eurozone economy, so its exit might not
be as catastrophic as some fear. In
addition, the EU has a habit of doing everything it can to prevent a crisis
from spinning out of control, so many observers expect a deal to be reached
before the worst happens. All of that is still true. As for us, we’ll continue to watch the markets
and study the latest developments. What we won’t do is overreact to one bit of
news, about Greece or anything else. The
day-to-day headlines, like the latest about Greece’s referendum, are merely
rocks amidst a great river. They may look imposing, but it’s the flow of the
river that we care about.
So here’s the way we’re
going forward. My team and I are always evaluating the state of your
portfolio. If we feel the need to
recommend any changes, or move to higher ground, we’ll certainly let you know.
What should you do? Get on with enjoying
your summer! And remember that we’re
here for you if you have any questions or concerns. Please feel free to give me a call at 215-886-2122. I’m always happy to hear from you!
