The Brink of Grexit


Well, the Greek voters were asked, once again, whether they would accept additional austerity measures that were demanded by their creditors, including the European Central Bank, the International Monetary Fund and the European Commission. And once again they voted—this time overwhelmingly (61.31% to 38.69%)—to hunker down and move the country to the brink of a Grexit from the euro currency.

Their choice may not have been hard to make. Virtually all of the $264 billion that has been loaned to the Greek government have actually been paid to the European banks who unwisely loaded up on Greek debt before 2009—and the loans and extensions, to them through Greece, has kept the European banking system solvent during the crisis. Virtually none of that money has gone back into the ailing Greek economy.

Over the past three years, the Greek government, following many of the demanded austerity measures, has actually reached the point of budget surplus, aside, of course, from the debt repayments. The cost: a skyrocketing unemployment rate that has reached 25.6%, including 60% of the nation’s young workers, and a steep recession which economists seem to agree would only get steeper if the country accepts the austerity demands. The Greek economy has shrunk by 25% over the last five years.

But the hardship continues. Anticipating a currency shift from euros to drachma, Greek citizens have staged the mother of all bank runs, trying to get as many euros out of the system as they could before they are potentially exchanged for lesser-value drachmas. The government limited the amount of their own money that citizens could withdraw to approximately $67 a day, and has now shut down the Greek banking system at least through end of the week.   Re-opening the banks could be problematic, since they don’t hold nearly as many euros as depositors have put into them.

Some are betting that the European Central Bank will provide guarantees and financial support to keep the banks from collapsing and taking the Greek economy down with them. But you can expect Germany to push back hard on this idea.

Will Greece leave the Eurozone? Nobody knows, but the vote suggests that the citizens of Greece have had enough of European (read: German) control over their economy and political decisions; indeed, some observers saw the extremely hard line at the negotiating table as a ploy to destroy Greek’s ruling Syriza party by forcing Greek voters to abandon it. There are sizable numbers of people in other European countries who feel the same way about losing control over their own affairs, who are closely watching how the European Union responds.

The discussions will be tricky. If the European Union offers further concessions, then you can expect Spain (unemployment rate: 23.1%) to ask for less stringent austerity and some space to get its own economy moving again. Portugal could be next.

And, of course, if Greece leaves, and begins to experience economic growth again, then those citizens in other countries could demand that their leaders also cast off the layer of oversight and control coming from Brussels.

What should you watch for? Greece is already technically in default as of last Tuesday, on $1.7 billion in payments. At the end of July, it will owe the next payment, in the amount of just under $4 billion. One compromise possibility is that the European Union, led by Germany, will reluctantly allow Greece to extend its payments, and also put together some kind of an aid package for the Greek economy that would help it become more able to make payments in the future.

How does this affect you? Once again, you’re going to see turmoil in the markets, and a temporary decline in the value of the euro on international markets. You’ll hear pundits and economists speculate about the “fate of the Eurozone,” and eventually, one way or another, everything will settle down again without affecting in any way the underlying value of the stocks you own. We’ve all seen this crisis a few times before, and each time the predictions of some form of doom haven’t come true. This “crisis” is very real to the Greek people, but the world will go on no matter how it’s resolved.

Now the current severe correction in the Chinese stock markets is a matter for another article, and that could prove much more important than the whole Grexit, if officials don’t wrest control of their markets.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

http://finance.yahoo.com/news/greece-says-oxi-heres-happens-180726938.html

http://www.nytimes.com/interactive/2015/business/international/greece-debt-crisis-euro.html?_r=0

http://www.nytimes.com/2015/07/06/business/international/eurozone-central-bank-now-controls-destiny-of-greeces-battered-banks.html?rref=business/international&module=Ribbon&version=context&region=Header&action=click&contentCollection=International%20Business&pgtype=Multimedia

http://www.nytimes.com/2015/07/06/business/international/eurozone-central-bank-now-controls-destiny-of-greeces-battered-banks.html?rref=business/international&module=Ribbon&version=context&region=Header&action=click&contentCollection=International%20Business&pgtype=Multimedia

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

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