How Does the Crisis in Greece Affect my Financial Plan?

Greece has a big decision to make very soon.

The turmoil in Greece has been dominating the news for much of the past two weeks, and we are aware that some clients are concerned about the impact of that situation on their investment portfolios.  So we want to explain the situation in Greece and alleviate some fear and concern that you may be experiencing.

If you have been following along in the news, you know that Greece’s population recently voted overwhelmingly against accepting the terms and conditions of the austerity measures required in the bailout package offered by the International Monetary Fund, European Central Bank and European Commission.   Prime Minister Alexis Tsipras and 61% of Greek voters opted to not accept the bailout package that required Greece to cut pensions, raise taxes and enact other reforms.

This ‘no’ vote is concerning to many investors because Greece has a 3.5 billion euro payment to the European Central Bank (ECB) due on July 20th, and Greece is likely to default on this payment without further financial assistance.  Of further concern to many is the likely need for recapitalization of Greek banks after a significant run on deposits, in spite of a recent restriction on withdrawals from bank accounts which limit ATM withdrawals to 60 euros a day.  This will likely further deteriorate the health of an already sputtering Greek economy.  Ultimately, Greece may be forced to issue scrip or IOUs to pay wages and pensions before finally being forced to printing its own currency to pay its bills; essentially ending Greece’s participation in the Eurozone.

The concern among many investors is that should Greece stop using the euro for currency, other countries like Spain and Italy, who are similarly opposed to austerity measures, may opt out of using the euro as well and weaken the Eurozone.  If Greece were to leave the Eurozone by abandoning the euro, it would be the first instance of a member leaving, and would leave only 18 members.

What impact would Greece leaving the Eurozone have?

Most experts agree that the Eurozone is strong enough to withstand Greece’s exit (Grexit) from the Eurozone and the default of 3.5 billion euro payment due to the ECB on July 20th.  Most of Greece’s government debt is held by European institutions and the European Financial Stability Fund meaning it is unlikely to cause a financial crisis that could occur with highly leveraged banks or hedge funds owning the debt.  Additionally, the ECB has a quantitative easing program in place which was not in place during past crises.  Economic indicators continue to point towards a recovery, meaning the economic recovery in Europe should continue in spite of what happens with Greece.  The fallout of a Greek exit from the Eurozone will likely be more devastating for Greece’s economy and a significant risk of capital flight to more stable economies and markets.

What should investors do now?

While we don’t know exactly how the situation in Greece will play out, it is important to remember that Greek equities and governmental bonds represent a very small fraction of our clients’ diversified investment portfolios.  There also appears to be very little fear of Greece’s economic malaise spreading to neighboring Eurozone members.   It is essential for investors to not panic or overreact to the news coming out of Greece, or other corners of the world for that matter.  We know that investment markets do not like uncertainty, and uncertainty causes short-term market volatility as we have experienced recently.  In the long run, we expect markets to recover as the uncertainty with Greece is resolved and investors feel comfortable again with developments in that region of the world.

While continued volatility can be expected in the short term as markets react to news coming out of Greece, investors must remain resolute to their financial plan and not react to news with emotional responses.  Temporary market losses can induce fear among investors, especially those close to or already in retirement, but past experience shows that emotional reactions to market conditions are the biggest obstacle to investors reaching their financial goals.

If you have any questions or concerns about the situation with Greece or other developments, please don’t hesitate to call our office at 419-878-3934.