Setting the Scene

Greek debt levels came to the world's attention in December 2009 when Fitch (international ratings house) downgraded the nation's credit rating. Greece had little government revenue due to widespread tax evasion, and it was revealed that the government had been understating its true debt position for years.

In an effort to avoid bankruptcy, Greece accepted bailouts from the Troika (International Monetary Fund, European Central Bank and European Commission) totalling more than $US264 billion. These were subject to harsh austerity measures that required an overhaul of the Greek economy. You may recall the riots…

But ooops - these funds have mostly been used for private creditors rather than build the foundations of a sustainable recovery. Reforming the economy and austerity measures have been enormously unpopular within the Greek population resulting in three changes of Government since 2012.

 

The current plot

Jump forward to the situation as it stood just last week…

Greece is once again running out of money to pay international debts. European officials extended the bailout program in February with the extension Tuesday 30 June when Greece was due to make a 1.6bn payment to the International Monetary Fund and also replenish emergency funds used to make a previous €750mn payment to the same institution. Big bucks!

Greece was offered a further bail out agreement by the European Union if it agreed to further austerity measures to cut pensions and raise taxes. This agreement also expired last Tuesday but Prime Minister Tsipras instead called for a referendum to be held on July 5 (which was last Sunday) for the Greek populace to choose whether or not to accept the European Union's proposal and financial aid.

The European Union announced there would be no extension to the existing program and froze Emergency Liquidity Assistance (ELA) last Friday. Over the weekend, Greek people rushed to ATMs to withdraw their funds and so the Greek government closed the domestic equity market for the week and restricted bank ATM withdrawal limits to 60 a day. The Greek banks have also been temporarily closed.

 

The plot thickens

As if things weren't already dramatic enough…

British Prime Minister Harold Wilson once famously said, "A week is a long time in politics", and ain't it the truth. The Greek referendum has come and gone and the Greeks have confounded most of the pundits and the opinion polls by voting 'NO' 62% to 38%.

Talk about a landslide… And a landslide that no one predicted – almost everyone felt that despite the austerity measures not being popular, the referendum would be passed.

Wrong!

So what does this 'no' vote mean in the scheme of things?

At this stage everyone has least agreed to negotiate. Fortunately for them the Greek Finance Minister, Varoufakis has resigned, so the European powers should find it less irritating to negotiate with their Greek counterparts going forward - Varoufakis was fairly combative to say the least.

In fact just yesterday Greece called an emergency summit where it asked for a 3 year loan form the European bailout fund. This was met with mixed reactions, especially as the Greek Prime Minister and Finance Minister were still unable to promise anything other than that by today they would announce plans to immediately implement tax and pension related measures starting Monday. This fate will be decided Sunday.

Now if they do leave the Eurozone, all this will cause the drachma to be substantially devalued as Greece prints money and it would reduce the value of its debt.

This will then start to assist its recovery however will have serious implications for other European countries awaiting repayment of its debts. The European Central Bank will be severely compromised given its holding of Greek debt, reducing its ability to assist other countries within the Eurozone.

 

Implications for financial markets

Angela Merkel and the other leaders of the Eurozone and Christine Lagarde of the IMF may not have blinked yet but they may soon do so, as failing to support Greece will be against their own long term interest. Maybe the Greek voters understood this when they mostly voted no last Sunday… 

The development of the crisis is still a day to day proposition and it will largely be a case of wait and see.

Activity in Greece primarily affects bond, share and currency markets.

 

Bonds

Greek bonds have already collapsed but are not likely to fall further into distressed/default territory.

Prices for German bonds may be driven up by a 'flight to safety' out of riskier European assets as investors fear further disruption in the Eurozone.

Australian bonds may also benefit from movement to safer assets.

 

Shares

Uncertainty leads to volatility in the short term and all markets will experience this from risk aversion.

It is likely there will be a selloff in Greek bank shares, along with any other European shares viewed as risky, in favour of other areas such as US and Australia. So a build-up of some cash in portfolios, while offering record low yields, provides an opportunity to take longer term advantage of weaker equity prices in the event of a short run sell off.

 

Currency

The euro has been relatively resilient to date – and let's face it, it's been through a lot -  however investors may move to the US dollar as a safe haven.

 

The Cliff-hanger

Far from the finale, as of today this Soap Opera ends on a cliff-hanger – leaving us wondering what, when, how much, and how long…

In our view, it will be a bumpy ride and as such, caution and patience are key. But we do also need to keep things in perspective. On it's own, Greece – representing the world's 43rd largest economy – is not going to have a huge long-term impact on economic growth and investment markets. If anything we should be more concerned about China, where the local sharemarket is down more than 20% in the last month. The Chinese government has a very good track record of stimulating the economy. But that's possibly a topic for another blog…

Ultimately, you shouldn't be overly concerned about market fluctuations if you have a long-term financial strategy in place to effectively cope with short-term falls in the sharemarket.

We believe that market volatility will continue for a while and as many of our current financial planning clients already know, we believe times like this usually call for some strategic defensive positioning. In particular, holding enough equity exposure to take advantage of any market rallies over the next 6-12 months, but also putting measures in place to help protect against 'downside' risk.

For this reason we prefer strategies that include tactical decisions, rather than 'set and forget' which is somewhat redundant in this environment.

Of course if you are concerned, or if it's been more than twelve months since you last sat down with us to review your circumstances and strategy, then please don't hesitate to shoot me an email, give me a call, or call 9725 2533 and make a time to come and meet with me.

 

Cheers,

Michael Crowe

Managing Director Financial Planning

Senior Adviser

Authorised rep 232696

 

The contents of this publication are general in nature and do not constitute or convey personal advice. It has been prepared without consideration of anyone's financial situation, needs or financial objectives. Formal advice should be sought before acting on the areas discussed. The authors and distributors of this document accept no liability for any loss or damage suffered by any person as a result of that person, or any other person, placing any reliance on the contents of this document.