GREEK DEBT CRISIS 2015
If you’ve opened a newspaper in the past
few days, you probably saw headlines about the Greek debt crisis. It’s possible you found these headlines easy
to understand, with no explanation required. It’s also possible you shrugged
your shoulders and said, “So what?” The
third possibility is that you thought to yourself, “Well, I don’t know why it
matters, but I’m sure Michael will
tell me more about it.”
If you chose door number three, you were
right!
In this message, I’ll explain the story
behind this Greek tragedy, and why events in the Old World can have an impact
on us here in the New.
The
Setting
Athens, Greece. As of this writing, reports out of this
proud, ancient capital are mostly calm right now, but that calmness masks the
turmoil that lies beneath. Banks have
shut their doors. ATMs are out of
cash. And banners proclaiming either YES
or NO hang throughout the city. More on
this in a moment.
The
Characters (Dramatis
Personae, as they would say in Latin)
A lot of people you’ve probably never heard
of, but who are nonetheless central players in a massive, continent-wide
drama. The key figure right now is
probably Alexis Tsipras, the Greek prime minister. Angela Merkel, the German prime minister,
Mario Draghi, chief of the European Central Bank, and Jean-Claude Juncker,
president of the European Commission, also have large roles.
The
Backstory
Simply put, Greece is massively in
debt. The main reasons for this are a
long history of enormous budget deficits (the government spending more each
year than they brought in) and inefficient use of government funds, among other
things.1 But the trouble
really started in 2008 when the global recession hit. Suddenly, many EU countries found that their
debts had caught up with them, especially Greece. The cradle of western civilization, as the
country is known, suddenly found itself nearing bankruptcy.
Because Greece is a part of a larger
community, the European Union, its troubles affect more than just Greeks. The EU is a political entity, but also an
economic one. Most of its member states participate in a single market, which
links each country together by using the same currency and economic
regulations. Many of these countries
agreed that if Greece were to go bankrupt and default on its debt, it would
harm them as well. For example, if
Greece cannot pay the debt it owes to other countries, those countries would in
turn have greater difficulties meeting their
obligations. This is sometimes referred to as financial contagion, and you can imagine it just like an actual
contagious disease. One person gets sick, then spreads it to people around him,
and so on.
So the powers that be – namely the European
Central Bank, the European Commission, and the International Monetary Fund –
took action. To solve (or at least
forestall) the crisis, they used a familiar word: bailouts. All told, Greece
was the recipient of more than 240 billion
euros in financial assistance.2
But you never get something for nothing.
In return for the money, Greece was required to institute austerity measures, mainly in the form
of budget cuts and tax increases to bring their debt under control. This has taken a large toll on many Greek
citizens, leaving thousands without jobs and with no access to healthcare. Last year, some reports suggested that rising
infant mortality rates, drastically lower hospital budgets, and even a spike in
suicides were all linked to the austerity program.3
From a big-picture perspective, the
bailouts helped Greece…but they didn’t cure the disease. That’s because the money was mainly used to
pay off loans rather than stimulate the economy. The austerity measures that went along with
the bailouts, meanwhile probably had a negative
effect on the economy overall. Think
of Greece like a leaking ship. The
bailouts did their job and plugged the leaks, but they also made life far more
miserable for the people onboard…and did nothing to make the ship any more
sea-worthy.
The Plot
All that drama has been playing out over
the past several years. So why is Greece
back in the news again? Because Greece
has finally defaulted on its debt. The
bailouts, it seems, merely delayed the inevitable. (Which may be a good thing from a global
point of view, as the world is better equipped to deal with Greek bankruptcy
than it was during the recession.)
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 referendum to be held on July 5, where citizens could
vote whether to accept more austerity measures.
Remember the YES and NO banners I mentioned before? A YES vote would mean more austerity in
exchange for another potential bailout.
A NO vote would mean Greece decides to go it alone. In the meantime, the government announced it
would close both the stock market and all banks for a week.
The Stakes
To sum things up: Greece is once again on
the verge of bankruptcy. If it 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.
Greece continues to negotiate with the EU and the IMF over some kind of
deal, but even if the Greek population votes YES, it might be too little, too
late.
The
Outcome
So what happens next? What will this drama lead to? And why should we care?
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
economic system. 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.
(As one writer put it, Greece’s GDP is roughly the size of Delaware.)4 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.
In the end, though, optimistic opinions and
pessimistic opinions are ultimately just that: opinions. No one knows for sure…and fear is in the
unknown.
As for why we should care? To put it simply, financial contagion can
spread across the pond, too. In this day
and age, everyone is linked. U.S. and
Canadian banks are intimately involved with European and Asian banks, because
they’re all constantly lending and borrowing money from each other. The same
goes for national economies. So if
Athens defaults, Paris and Berlin may suffer. If they suffer, Washington and
Ottawa may suffer, too. And while President Obama recently urged Americans to
rest easy5, the markets have been jittery. The Dow, for example, dropped 350 points on
June 29, and the S&P 500 fell 2%, largely out of concern for what’s
happening in Greece.6
So why should you care? Why does this
matter? Because in the 21st century, what happens in one hemisphere
affects the other. What happens in our hemisphere
then affects our country. Our country
affects the markets, which in turn affects… you.
Understand, that this doesn’t mean you have to follow Greece’s every
move, or that these headlines are guaranteed to significantly affect your
portfolio. There are many factors to take into account, and Greece is just one.
In fact, part of my job as your financial advisor is to make sure that no
single event makes or breaks your
portfolio. For that reason, I see no
reason to stress. We should continue
remaining watchful, of course, but calm.
In this global community we’re all a part
of, the ripples near one shore will always reach the other. Greece has been and
will continue to be in the news, so whenever you hear about them, I want you to
know just why it matters and why you should care. That way, you can ask the right questions.
And you’ll know that all of us here at Schwartz Financial are constantly
watching the news and putting it into context. So if anything happens, even
across the ocean, we’ll know about it.
We’ll know why it happened.
And we’ll know what to do about it.
If you have any questions about how this
news impacts you, or if you just want to chat about your portfolio, please
don’t hesitate to call me at215-886-2122. I would love to speak with you!
Sincerely,
Michael L. Schwartz, RFC, CWS, CFS
Michael L. Schwartz, RFC, CWS, CFS, a
registered principal offering securities and advisory services through
Independent Financial Group, LLC Member
FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated
entities
Sources
1 “Update of the Hellenic Stability and Growth Programme, pg. 14” Greece
Ministry of Finance, January 2010. http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2009-10/01_programme/el_2010-01-15_sp_en.pdf
2 James Kanter, Jack Ewing, Liz Alderman, “Greece’s Debt Crisis
Explained,” New York Times, June 30,
2015. http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html
3 Charlie Cooper, “Tough austerity measures in Greece leave nearly a
million people with no access to healthcare,” The Independent, February 21, 2014.
http://www.independent.co.uk/news/world/europe/tough-austerity-measures-in-greece-leave-nearly-a-million-people-with-no-access-to-healthcare-leading-to-soaring-infant-mortality-hiv-infection-and-suicide-9142274.html
4 Zachary Karabell, “The Greek Catastrophe is Finally Here,” Politico.com, June 29, 2015. http://www.politico.com/magazine/story/2015/06/the-greek-catastrophe-is-finally-here-unless-it-isnt-119519.html?hp=m3#.VZLlkflVhHw
5 Nick Gass, “Obama on Greece: Meh,” Politico.com,
June 30, 2015. http://www.politico.eu/article/obama-tries-to-ease-u-s-market-jitters-on-greece/
6 Heather Long, “US Stocks suffer worst drop of 2015 on Greek default
fears,” CNN Money, June 29,
2015. http://money.cnn.com/2015/06/29/investing/stocks-markets-greece-us/index.html?iid=EL
