An Update on Greece

Equity markets had their worst day of the year Monday and it seems to be all about Greece. The standoff between the nation of Greece and the leaders of the European Union is a mess, but it may not be quite to the proportion that the press is making it out to be.

 

In case you haven’t been following the story, the Greek government over a period of years issued more bonds than it could possibly pay back.  The total debt outstanding peaked at somewhere around $340 billion, which is actually more than the $242 billion in goods and services that the entire Greek economy produces in one year.  A series of bailouts organized by the European Union, the International Monetary Fund and other groups have collectively extended loans and extensions amounting to $217 billion to date. Of which about $7 billion in payments are due in July and August.

 

There are three clear problems. 

1.  It has become clear that Greece does not have the money to make the July and August payments. 

 

2.  In return for additional debt relief, the various creditors are asking the Greek government to do more than just balance its budget.  Their demands seem a bit harsh and demanding, and are listed below:

 

• Reduce pension payments to current and retired workers by 40% 

• Raise the retirement age to 67 in 2022 instead of 2025 

• Phase out supplemental bonuses for poorer retirees in 2017 rather than 2018  

• Cut back on early retirement effective immediately

• The proposals also include additional taxes on consumers, but not businesses

 

3.  The newly-elected Greek government, led by Alexis Tsipras of the Syriza party, ran on a platform of rejecting any further budget concessions and compromises.  This turned out to be an extremely successful political strategy as the party won 149 out of the 300 seats in the Greek Parliament, which was regarded as a rousing popular mandate.

 

Predictably, negotiations broke down and now the Syriza leaders are asking the Greek citizens to vote on whether they will accept or reject the austerity measures that the EU creditors are demanding.  Greek banks have been shut down in advance of the July 5 vote, strongly suggesting that Greek leaders who are not in favor would no longer use the euro as its currency. They would instead print drachmas, which in frozen bank accounts would replace euros at par.  The drachmas would immediately lose value in the international markets and that would allow Greece to undercut its competitors in the export markets.  Meanwhile, Greece could default on all or portions of its debt and offer to pay drachmas instead.

 

Who loses in this scenario?  Everybody.  The European banks holding Greek debt and private investors are the obvious losers.  But closer to home, any Greek citizen who didn’t get his or her money out of the bank before the freeze will have to accept a haircut on the deposits because drachmas will inevitably be worth less than euros.

 

At the same time, many Greek banks are holding massive amounts of Greek government debt, which they need as collateral for European Central Bank loans that are keeping THEM (the banks) afloat.  Alternatively, Greece could offer everyone 50-70 cents on the dollar in debt repayments and would probably get mostly takers from creditors who would like to put this whole saga behind them. 

 

Do YOU lose in any of these scenarios?  If either side blinks, then the situation goes back to business as usual.  If Greek voters agree to give the EU what it wants, then some economists believe that the Greek economy will go into a steep recession.  However, your personal exposure to Greek companies is almost minimal and the problem will be temporary. 

 

If Greek voters vote “no,” the EU negotiators remain intractable and Greece leaves the Eurozone.  In turn, you can expect breathless, scary headlines and short-term turmoil in European stocks.  But the smart money says that the Eurozone is strong enough to sustain the loss of one of its smallest economies, and Greece will survive as well. 

 

The irony is that after accepting many of the earlier austerity measures, the Greek government is actually running a budget surplus without the debt payments—something U.S. citizens can only dream of.  If the additional austerity measures do get put in place, the subsequent recession would reduce tax receipts and push Greece back into deficits again. 

 

If you’re a Greek citizen who hit the ATM machines after they had run out of money, then this is a pretty big crisis for your long-term financial situation.  Otherwise, similar to most so-called “crises,” the possibility of a Grexit and the upcoming special election in Greece is more about entertainment than about making or losing money in your long-term portfolio.

 

 

 

Bottom Line:  If Greece leaves the EU and the correction gets worse in Europe, it may create an excellent buying opportunity for European stocks. Otherwise this is just more financial noise and nothing for an American investor to worry about.

Feel free to contact us if you have questions or would like to discuss your specific portfolio. We appreciate the continued confidence and the opportunity to serve you and your family.
 
Best Regards, 
Lyn

 

July 2015