Greece Defaults - Now What?

Jun 30, 2015

Today, Greek banks and the Greek stock market were closed, as they will be all week.  Meanwhile the Greek citizenry are getting set to vote on a referendum that could determine whether they remain part of the European Union or exit.
 
At this point, no one knows how this will play out.  Greece is in a tough position.  They could stay with the Euro, try to pay their debts and continue to see pension cuts for retirees and increases to their taxes.  Or, they could exit from the Euro and move to their own currency. Then they would deal with the aftermath of defaulted debts, likely currency depreciation, a continued recession and little hope for economic improvement, at least in the short-term.

Will the Impact be Contained?

While recognizing that Greece is in for a tough road ahead, how will their decisions affect the rest of us?  In the past, European banks owned much of Greece’s debt.  Today, a large percentage of the debt is owned by the International Monetary Fund and the European Central Bank.  As a result, European banks will not see their balance sheets significantly impaired due to any Greek default.  US banks are even less exposed.  The international banking system should be able to operate normally.

The European economy is also in better shape today than it was a few years ago.  Countries and corporations doing business with Greece will likely be doing less business.  However, given that Greece is a small economy, its impact on the overall European economy shouldn’t be great.  According to the World Bank (in 2013), Greece’s GDP placed it as the 43rd largest economy, between Finland and Pakistan.  Greece’s economy is smaller than Egypt, Malaysia and Denmark.  Germany’s economy is 15 times bigger than Greece’s.

What Does it Mean for the U.S.?

Europe will get the flu and we will get a cold, both of which should be short-lived.  This might be the best way to illustrate what could happen.  Again, we don’t know for sure.  The likelihood is that Europe will be somewhat impacted in the short-term and their ripple effect to us might be noticeable.  

What should we be doing as investors?

If the broader consequences from Greece’s predicament are likely to be short lived, then any significant market movements could present investment opportunities.  This is not to say we would jump into the Greek stock market when it reopens. However, if other broader stock markets experience significant losses, the opportunity may exist to buy equities at lower prices --- and that doesn’t sound too bad.

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