The Daily Difference-An Update On Greece-Opa!
No, that was not a cheerful Opa! The actual meaning of “Opa!” literally translates into Oops, or Whoops, though the word is flexible and has taken on many different meanings. For now, we will go with Oops. “There are decades where nothing happens; and there are weeks where decades happen.” ― Vladimir Lenin (1870 – 1924)
How did Greece arrive at this point?
Being in a state of financial crisis is really nothing new for Greece. As the chart below, courtesy of BofA Merrill Lynch, shows, Greece has been here repeatedly. Over the past 200 years, Greece has had 5 defaults and has been in some form of restructuring or default for 48 of those years.
The story of how Greece arrived at this particular point begins with the creation of the Euro. Greece falsely represented its financial health in order to be accepted into the EU, and the strength of the Euro has compounded an already weak Greek economy. Greece and the European Union (EU) have been working together (rather unsuccessfully) for the past 5 years to derail this crisis. One of the biggest hurdles has been dramatic philosophical differences amongst the Euro-Zone countries with regard to how they handle their finances, most notably Greek’s inability to simply get its citizens to pay their taxes. Tax evasion has become so widespread that the underground economy is estimated to equal more than 25% of the country’s GDP. The most recent escalations have percolated up to the surface after negotiations between “The Troika” (the European Commission, the European Central Bank, and the IMF) and Greece failed. The Greeks voted against accepting a June 25th plan offered by creditors.
How important is Greece to the Global Economy?
While Greece is dominating the global financial headlines, in economic terms, the country is relatively small. Greece’s economy accounts for less than 2% of the EU. Compare this to countries outside of the EU and Greece represents around 0.4% of the world economy, or roughly the same GDP as the state of Connecticut. So, while any major industrialized country defaulting on its debt is significant, the Greek economy is really very small.
Furthermore, the EU and the European Central Bank have effectively built an economic firewall around Greece. The vast majority of Greek debt has been removed from bank and private balance sheets, and is now held by other governments and international institutions that are strong enough to cope with a default. Some U.S. hedge funds are invested in Greek banks and have already taken hefty losses, but most global banks have relatively little at stake in Greece's financial system.
Finally, the European Central Bank stands ready to inject further liquidity into the European financial system as needed to stave off secondary and tertiary effects.
What’s next for Greece?
Unfortunately, the Greek people will take the brunt of this. They will see further economic hardship in the days and weeks to come as bank deposits have been blocked, withdrawals are restricted to 60 Euros per day, and a general sense of panic has set in.
Reaching a new deal with its creditors is critical for Greece, as the liquidity squeeze is intensifying and the Greek government has further financial obligations coming due in the coming weeks. Any agreement will require greater flexibility from Greece than it has demonstrated thus far.
The intensifying liquidity squeeze and resulting economic issues will place significant pressure on the Greek government both from its citizens and its creditors to reach a deal.
How big of an impact will the ongoing Greek crisis have on my equity portfolio?
As the scenes coming out of Greece get worse over the coming days and potentially weeks, increased volatility will certainly be felt across all asset classes. We would expect some level of selloff in equities, mostly European. However, as explained above, the combination of the “Greek firewall “and the ECB standing ready to react as needed, limits the downside potential. The effects likely will be short lived, and potentially should be viewed as a buying opportunity to gain access to undervalued equities within the Eurozone. We strongly believe that investors should keep their long term asset allocation plan in mind rather than reacting to headlines.
Will the crisis spread to other parts of Europe?
The risk appears to be contained since the European Central Bank stands ready to buy the debt of other Eurozone members. Furthermore, the ability of The Troika to hold its ground with Greece sets an important precedent for other EU countries that might need some level of financial assistance down the road.