The financial media loves to move from crisis to crisis and spice things up by creating eye-catching headlines! Over the course of the last few months an old friend has popped back up as the lead story and it isn’t due to being the birthplace of the Olympics or tasty baklava. Greece is once again in a financial crisis and its future will not only impact Europe but also economies around the world.
While the issue is complex and there are many moving pieces what it ultimately comes down to is Greece has a spending problem. The country is like a college freshman that just got their first credit card and has gone on spending spree oblivious to any repercussions. Picture that freshman opening their first bill after they have decked out their dorm room and realizing they can’t make even the minimum payment. This is the dilemma that Greece is facing… again!
How did we get here?
To keep it simple, Greece has built up a mammoth amount of debt by spending more than it generates. The balance sheet for the country is essentially covered in red ink. The retirement age in Greece is 57 (62 in the U.S.) creating an additional burden on the country. Tax evasion is also a huge issue for the country; Greek politicians have often referred to it “as the national sport”. It’s estimated that over $30 billion per year goes uncollected in taxes.
Greece borrowed billions of dollars from various European banks to address their issues years ago; in 2011 they negotiated the loans to 50% of the original amount. Then they couldn’t pay those loans back and that is when the “troika” (International Monetary Fund (IMF), European Central Bank and European Commission) came to the rescue. They received two bailouts totaling nearly 250 billion euros (over $275 billion U.S. dollars) to assist in their financial crisis.
The country finds itself in the position it is today because NO changes were made – they continue to operate as they always have. The problems in Greece have become both an ideological and controversial struggle. Germany has been the lead country in imposing austerity measures although ironically enough its own government did not achieve a budget surplus from 1970 to 2011! The austerity plans called for less spending, addressing tax evasion and raising taxes. With no significant changes the country now finds its unemployment rate over 25% and its debt at nearly 200% of the country’s GDP.
What is at risk for Europe and the world?
Most economists feel that Greece does not present a systematic risk to the overall global economy. The ‘Eurozone’ consists of 19 different countries and has slowly climbed out of recession posting positive growth the first quarter of this year. The bulk of the debt that Greece owes is no longer held by European banks so a default is not expected to bring the EU down.
The bottom line is that challenging decisions need to be made in Greece and the citizens most likely have a rough road ahead of them. Whether they stay in the EU or not they must make changes to get their house in order and address their financial issues. As Axel Merk, CIO at Merk Investment recently said, “Everything is at risk for Greece, they can choose between making a tough or horrible choice. Both are painful.”
What to do now?
The current status of Greece should not be a surprise to anyone as it has been developing for years. Focus on what you can control and stay focused on your portfolio strategy and allocation. If you own any positions that are related to Greece you’ve already seen huge volatility. For example look at the ETF (Exchange Traded Fund) GREK: -20% this year and -54% over the last 12 months.
The thought of any country essentially declaring bankruptcy will always catch headlines but let’s put this in perspective. The following members of the European Union all have larger GDP’s than Greece: Denmark, Austria, Norway, Belgium and Sweden. If you look at it on a domestic basis the following US cities have more of a global impact than the entire country of Greece: Houston, Dallas, Philadelphia and Boston.
With the vote taking place this Sunday the world will soon know how to move forward with the economic issues in Greece. At the end of the year investors will most likely look back and group Greece with other past issues both domestic and international. We encourage you to stay focused and informed but don’t allow you or your portfolio to be impacted by this ‘Greek tragedy’. If you are planning a vacation to Greece bring plenty of cash – you will find great deals but the ATM’s might be empty!