This weekend’s announcements that bail-out talks have stalled, the Greek government has called for a referendum on whether to reject or accept the terms on offer from the Eurozone, and the announcement that the ECB will cease to provide liquidity to Greek banks means that, barring any other surprises, the Greek debt boil is about to burst.
The great tragedy of the situation that Greece finds itself in lies in the fate and daily plight of the Greek people. The finger pointing, insults and intransigence of two groups of politicians backed into a corner by their own political dynamics appear to have led to a place where, by all accounts, no-one wants to be – the potential Greek default on its debt and ultimately its exit from the Euro, or ‘GREXIT’ as it has become known.
For sure, both sides have egg on their face – the Greeks for entering the Euro having hidden debt offshore with the help of investment bankers, an over-bloated state with laughably generous pensions and a failed and corrupt tax system – and the Eurozone for persisting with the demand for austerity that is crippling the economy and the inability to see its way to some form of debt moratorium (a route supported by the IMF). History will apportion blame.
How bad is the situation?
For the Greek people, the situation is dire: unemployment is more than 50% amongst the young, suicide rates have risen dramatically and it has been estimated that food consumption has dropped by around a quarter since the crisis began, a sure sign that things are very tough. The wealthy remain so, but the rest are struggling, despite years of sacrifice. The Greek economy is 25% smaller than it was before the crisis.
From an economic perspective, if Greece fails to repay the IMF loan on Tuesday and the people reject the Eurozone terms, then Greece and the Eurozone are in uncharted waters. Default, capital controls, exiting the Euro and the re-emergence of the Drachma are all possibilities, as are social unrest and contagion in other markets. Perhaps the Greek people will step back from the brink – who knows? Markets are, as a result, likely to be volatile in the coming days, weeks and months.
Keeping things in perspective
It is important to keep this all in perspective. Whilst the Greek debt crisis continues to make headline news in the UK, it is unlikely to be making as much of an impact in countries like China, the US and India. Total Greek debt stands at €320 billion (although the ECB may have some exposure via is bank liquidity programme). To put that number in perspective, Vanguard – the fund management company – manages over $3 trillion of client assets. The US national debt is $18 trillion and global debt stands at over $56 trillion. The entire Greek debt represents a little over 3% of Eurozone GDP. From a direct economic viewpoint, it is a smallish problem. The political ramifications for the Eurozone are, possibly, larger. The UK’s exposure is small with only around £1.7 bn at risk, which relates to its commitments to the IMF. UK banks’ exposure is estimated at less than £10 billion, far lower than the fines they have incurred this year.
In the context of real concerns in the world, such as Islamic States’ horrific evil perpetrated in Kobane, Kuwait, France and Tunisia this weekend, and its nihilist psyche, and Putin’s determined efforts to undermine the EU and Nato, Greece is a side-show, denting more pride than national balance sheets (barring that of Greece of course).
Direct exposure to Greece in investment portfolios is virtually non-existent
From an investor’s perspective, the direct exposure to the Greek stock market is miniscule. In 2013, Greece was moved from the developed markets back into the emerging markets and it represents only 0.33% of the MSCI Emerging Markets Index. Given that this only makes up around 10% of the growth assets in client portfolios that would be a 0.03% allocation in a 100% equity portfolio and less in a balanced portfolio. On the bond side, Greece’s credit rating has been downgraded to sub-investment grade, which does not meet the high credit quality constraints that we impose and is therefore not included in client portfolios. Any Euro weakness will be hedged out of the bond element of the portfolio.
The most likely market impact is short-term volatility as markets try and absorb the impacts of developments and new information as it is released – that is what markets do.
This is a time for fortitude and persistence
In terms of your investment portfolio, you should remain confident in its structure.
The temptation is always to do something, but usually – and we believe it to be so in this instance – the best thing to do is to believe in your long-term, globally diversified structure, and ride out the uncertainty. In the meantime, spare a thought for the Greek people.
As ever, we will remain vigilant on your behalf and keep you posted, but for the meantime keep calm and stick with the programme. Please do call us if you have any specific concerns.
