Greece and the Euro

For several years now there has been speculation of an eventual “Grexit”, that is a Greek exit from the European Union.

Following ongoing negotiations between Greece and the European Central Bank (ECB), the International Monetary Fund (IMF) and European Union (EU), the Greek parliament has scheduled a referendum to take place on Sunday the 5th of July for the Greek people to vote on whether to accept the latest debt bailout terms. Rejection of these terms (as recommended by the Greek government) may well see Greece default on it’s debts and leave the EU. A debt payment is due to the IMF on Tuesday the 30th June, which Greece is expected to now miss.

Implications for Greece & Europe

Greece has implemented capital controls – for instance closing their share market and all banks until after the referendum. Share markets have reacted as might be expected, with market falls on Monday of around 2.2% in Australia, around 3.5% in Germany and 1.8% in the US, but a more steady market in Australia today.

Morgan Stanley suggest the likelihood of a Greek exit from the EU has risen to 60% (on a 12-18 month view), though polling in Greece suggests two thirds of people want to stay in the EU.

Potential outcomes could include more manageable debt terms, default by Greece, a new election in Greece, and potentially a Greek exit (forced or voluntary).

Implications for investors

While Greece represents only a very small part of the global economy (less than 0.4%), the concern for markets is the risk of contagion – the risk of European Central Bank tightening, or increased funding costs to larger European economies (eg Spain and/or Italy). Fortunately, European banks are in better shape, as are Spain and Italy’s budgets.

So, while markets dislike uncertainty, several economists and fund managers expect short term falls, but see them as a buying opportunity particularly in the USA and stronger parts of Europe.

As always, we encourage clients to look past the newspaper headlines, and take comfort from their portfolio diversification and the longer term benefits of share market investing.

If you have any questions, please feel free to contact us.

Published : 30 Jun 2015

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