Summer is here and all eyes are fixed on Greece. As the month of June comes to an end, so does time for the country to negotiate an extension of its existing debt relief program. The ebbs and flows of the Greek financial situation has led to increased volatility in global equities, currency and bond markets. Recently, global stock markets have been tumultuous.
Greece proposed an eleventh hour deal to extend its credit for two years. European leaders are reviewing this but it does not seem likely that they will negotiate at this stage. It is doubtful that they will grant a two year extension to a government that has been telling its people to reject the current deal. This past weekend, the Greek government announced a July 5th referendum to approve the proposed creditor terms, which in fact expire five days prior to the public vote. Greece is expected to default on the 1.5 billion euro payment due of the 3.5 billion euro loan. At that time, undisbursed funds available to Greece will cease to exist. On Wednesday, after all terms expired, The Greek government decided to accept most of the bailout creditors’ demands but still insist on a handful of significant changes that will present a problem for the deal to take place. And so the drama continues.
The Greek people are scared and angry. The stock exchange and banks remain closed for an undetermined period of time in Greece. Draconian capital controls are in place, which has already affected tourism, a main source of income and employment in Greece. There is a lot of emotion involved and it is unknown how they will vote on July 5th. It is a close call. If Greeks vote NO on the debt referendum, it is not likely that Euro zone leaders will agree to a sweeter offer because the citizens of those nations will be left with the bill. Also, any deal would have to be agreed upon by individual European nations and they have no particular desire to do so. If Greeks vote YES, it will be easier for positive change to take place. It would lead to the eventual exit of the current government, which have resisted demands for Greek structural reforms by the International Monetary Fund, European Commission and European Central Bank. In time, the escalating financial crisis may improve.
There is no legal mechanism to kick Greece out of the Euro zone. Greece would need to vote to leave. The majority of Greeks support staying in the Euro zone but this number has declined in recent polls. If Greece were to leave, the recession in that country would likely deepen. There will be high inflation, food and fuel shortages and potentially violent social unrest. The value of the Greek drachma will fall with nothing to back it and no one will voluntarily exchange Euros for drachma. There is a concern that a Greek default could pressure the credit ratings of weaker Euro zone members and lead to more political uncertainty in peripheral countries.
What does all of this mean for investors? Investors can expect uncertainty and market instability in the short term but this crisis is not expected to change the overall financial direction of stock markets on a global level. Continued US economic growth is expected to remain on track. Stronger than expected US economic date on housing and consumer sentiment was released throughout the past week. Unemployment continues to approach the 5% mark. The Euro zone economy as a whole is improving, as well.
The stock market offered mixed results in the first half of 2015. All time highs were reached in equity markets but the gains were wiped out by the financial crisis in Greece. This year, there were some clear stock winners, others with modest gains and others in a downtrend. Where 2014 was a difficult year for diversified portfolios, 2015 is shaping up to be the perfect argument for having a broad, diversified mix of investments. More money shifted from bonds to equities due to increased investor confidence. Hopefully, the positive trends in the economy and the markets will continue throughout the year.
As always, if you have any questions or wish to discuss your portfolio, please contact our office.
Olivia A. Mussett, CFP®