Presented by Eric Figarsky
This
week’s headlines are sure to be dominated by Greece. The Greek government’s decision
to pull out of debt-relief negotiations with the rest of Europe was a shock. Essentially,
the Greek government has doubled down on confrontation with its creditors—and
very possibly eliminated the possibility of any agreement at all. We should
expect more provocative headlines to follow in the days ahead.
Beyond
the headlines, though, the reality is that the damage from this crisis is
likely to be small. Remember:
·
Greece
makes up a very small part of the European economy and an even smaller part of
the global economy.
·
Everyone
has seen this coming for a long time.
·
Markets
are reacting, to be sure, but in a measured way. No one is panicking.
·
The
fundamentals remain strong and are actually improving.
Greece
is a problem, but it is primarily a problem for the Greeks and, to a smaller
extent, for the Europeans. For the U.S., although we should pay attention,
there is no reason for panic at this point. We’ve seen this movie before, in
2011. Everyone—Europe, the U.S., and their banking systems—is much stronger and
better prepared this time. So, I think this too shall pass.
What are the ramifications for Greece’s
withdrawal from negotiations?
This
crisis has resulted because Greece borrowed too much money. It simply can’t pay
back the funds and is now relying on external creditors to keep its financial
system, including its banks, open. The Greek withdrawal from negotiations means
that the existing financial support will expire shortly, and payments—which,
again, the Greeks cannot make—will start coming due.
In
the very short term (i.e., this week), the European Central Bank (ECB) has
stopped providing additional support to the Greek banking system. This has forced
the closure of that banking system and put a limit on the amount that can be
taken from ATMs to prevent excessive withdrawals. The country’s stock market
has also shut down. This will hold until the referendum on Sunday, July 5, when
the Greek people will be asked to decide whether to agree to continued cuts in
spending in exchange for continued financial support.
If
the people vote “no,” then this week is the first stage of what could be a very
nasty exit (or “Grexit”) from the eurozone and the European Union (EU). No one
knows exactly what will happen because it has never happened before. It was
never supposed to happen. This uncertainty is fueling the fear that investors
are feeling right now. Although a deal remains possible, it is increasingly
unlikely, and governments and markets are preparing for a Greek default and
exit.
Why there’s
little need to worry
What
the markets are telling us, though, is that a Grexit may be much less damaging
than expected. What is most surprising is how little reaction there has been so
far. Yes, European markets are down—but not excessively so. You hear
resignation and disbelief, rather than panic. There even seems to be a sense of
relief that a resolution to this multiyear issue may finally be at hand.
This
lack of reaction makes sense. Expected events may be tragic, but they aren’t shocking.
The Greek default has long been foreshadowed, and a great deal of work has been
done to protect against just this event—much as we saw with Y2K more than a
decade ago. Economies and financial systems around the world are much more
solid than they were in the last crisis. Arguably, the eurozone and EU would
even be better off, economically at least, without Greece. Eliminate the
constant drama and uncertainty and countries could focus more on moving forward
and less on resolving past problems.
The
lack of reaction makes sense when you look at the fundamentals as well. Apart
from Greece, European economic growth is accelerating, according to Bloomberg
economics. The U.S. economy is also in the best condition it has been in since the
financial crisis. With both the U.S. and Europe growing more quickly, the likelihood
that a Greek default would rock the world is much less than it was five years
ago.
The
world financial system is also well prepared for a Grexit. Most Greek debt is
now in public hands, not private, meaning a Lehman-like wave of contagion in
the private sector is unlikely. The ECB has already started a quantitative
easing program to support the European economy, and it could easily take
additional steps to counter any problems stemming from a Greek default. Fundamentally,
from both an economic and financial perspective, there is no obvious reason to
panic.
Finally,
as mentioned earlier, this all happened before back in 2011. Then, panic ensued
because no one was prepared. Now, we are. Then, economies were still shrinking.
Now, they are growing. Then, banking systems were weak and exposed. Now, they
are much stronger and less exposed.
In
short, any Greek default—which looks probable, although not certain—would cause
damage, but that damage would most likely be limited and nothing to worry
about, even in Europe itself. Here in the U.S., we are even more insulated and
thus less vulnerable. Although risks remain, any damage here in the U.S. should
be both limited and short lived.
###
For IARs: Eric Figarsky is a financial
advisor located at Mark Phillips & Associates, 19712 MacArthur Blvd., Suite
225, Irvine CA 92612. He offers securities and advisory services as an
Investment Adviser Representative of Commonwealth Financial Network®,
Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at (949)
333-6394 or at Eric@phillipswealthmanagement.com.
Authored by Brad McMillan, CFA®,
CAIA, MAI, chief investment officer at Commonwealth Financial Network.
© 2015 Commonwealth Financial Network®
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