July 2015 Monthly Insight: The “Greek Tragedy” of Debt Default

Posted By T. Lee Sherbakoff, CPA/PFS, CFP® on Jul 15, 2015


Over the last month, Don and I have watched with passive interest the long-running saga regarding the potential of Greece defaulting on its scheduled debt payment on June 30.  This “Greek tragedy” has actually been running since at least December 2009.  As a matter of fact, since Greece won its independence from the Ottoman Empire in 1832, it has been in default or rescheduling its debt 51% of the time.  Last Tuesday, Greece defaulted and missed its scheduled €1.6 million payment.  Later, the International Monetary Fund and the European Central Bank cut off emergency funding to Greece after it rejected the latest offer from the euro zone and Greece called for a nationwide referendum accepting the austerity measures demanded by its creditors, such as reducing public pensions and cutting its budget.  On Sunday, the Greek voters voted “no” to accepting the euro zone package.

Market Reaction

The day after Greece announced its call for the referendum, the worldwide markets reacted.  However, the reaction was more like a sudden chill running up the back of the market than out right panic or market collapse.

There are several reasons for this limited reaction.  One, any Greek default has already been priced into the market.  As mentioned earlier, this is a long running crisis and any potential default was highly anticipated.  Second, the Greek Gross Domestic Product is approximately $240 billion.  That’s about the same size as Detroit, Michigan, metro area’s GDP of $224 billion and only 2% of the European GDP.  Third, most of the Greek government bonds are owned by public institutions that do not panic nor default themselves.  In the aggregate, about $350 billion of Greek debt is at risk, but only around $40 billion resides in commercial banks.  Out of that, $14 billion is owed to US banks.  And, with respect to the US economy, President Obama said that the US was encouraging both sides, but the financial crisis, though substantial, primarily affects Europe.  In 2014, the US exported $773 million in goods to Greece.  That compares with a US economy that totaled over $17 trillion.

So, what is at stake in this crisis? Well, it’s more than just credit and financial issues.  For Greece, it boils down to sovereignty and democracy.  Do the desires of a nation state outweigh the goals of a 28-country European Union or 19-member euro zone?

For the euro zone, it’s a test of unity and speaking with one voice.  Can a country or countries within the 19-nation single currency block act with impunity in disregarding economic standards and previously agreed to rules and can such countries be brought back into line?

The Way Ahead

What does this situation mean for investors? What are investors to do? First off, however, as you have heard Don and me say several times, we do not know what the future holds for Greece or anyone else.  Nor, do we know how or when the market will react to whatever happens in Greece or anyplace else.  We do believe all investors should continue to expect periods of volatility.  In addition to the happenings around the EU in Greece, the US Fed continues to watch the economy very closely.  Based upon the data the Fed studies, it may begin to increase interest rates as the economy improves.  On the other hand, as the dollar improves especially against the euro, exported US products and services become more expensive to the importing countries.  This could hold down US economic growth.  For the Greek population itself, it’s a different matter.  In the short-term, this crisis will create very difficult conditions.

Going forward, as always, we believe that your portfolio should be a well-diversified, multi-asset, multi-sector portfolio that aligns with your goals and objectives and your risk tolerance.  If your goals and objectives have changed or you feel you have not thoughtfully developed such a well-diversified portfolio, we should talk.  Do not fall victim to market timers or unknowing financial journalist, for no one knows the outcome of the current “Greek tragedy” or the near-term future movements of the market.

Trying to predict the future, regardless of what you think you know now, often leads to inappropriate decisions made at inappropriate times with unexpected outcomes.  Please call Don or me if you have questions or comments.

As always, we appreciate you and want you to know our gratitude for the trust and confidence you’ve placed in our firm to be your and your family’s financial advisor.


DISCLOSURE: All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.