Understand the Greece Financial Crisis

In the 80’s, Grease was the word! And it’s back… just not in the same way.  Greece is playing a dangerous game of chicken with the Eurozone creditors this week by voting ‘no’ to the terms of a bailout offer. Theus Wealth Advisors is here to help you understand what is going on with the Greece financial crisis.

All throughout history, there’ve been defaults.  It’s more common than most people probably realize…because most of us don’t pay attention to these things, until they impact us personally.  So, we’re going to take a look at some of the facts of this situation and any factors that may have an impact on portfolios.

The difficulty in Greece has escalated into somewhat of a showdown. The general state of Greek finances should not be news – the focus has been on Greek fiscal woes since at least 2009 when Prime Minister George Papandreou was elected. In addition, Greece’s €245 billion bailout package from the European Central Bank (ECB), the International Monetary Fund (IMF), and the Euro Commission has garnered seemingly innumerable headlines over the years. Unfortunately, many of the fiscal reforms that Greece agreed to, were either not undertaken or failed to produce the desired result. In fact, if you listen to the current Greece’s Minister of Finances earlier in the year, he basically said: “We commit to nothing. We are not going to change, despite the massive debt and destruction we’ve created.”

So, what’s all the kerfluffle about?  Well…28% unemployment; massive pension benefit and entitlement obligations; people retire very early (40-50s) and want full benefits.  It gets difficult to pay those promised benefits when you run out of other people’s money, and you’re ‘killing’ the remaining tax base with higher taxes.

Greece had a June 30 midnight deadline to make a €1.55 billion payment to the IMF. Talks broke down when Greece announced a referendum for July 5th and requested a one month extension of the June 30 deadline. If you were watching the news this last Sunday, (I was watching the World Cup), the people voted ‘NO!’ on the referendum to accept the austerity program that the creditors were requesting.  This Monday, nearly all banks were closed and ATM withdrawal amounts were limited.  What to do…what to do?

Well… going back decades to the 1820s, we can see that there have always been Sovereign Debt defaults.

Theus Wealth Advisors understands the Greek Financial Crisis

In fact, there is rarely a year, when some bank or nation isn’t defaulting. It’s almost normal!  The graph below shows the last 40 years’ worth.

Understanding the Greek Crisis with Theus Wealth Advisors

A default is simply a restructuring of existing debt.  Not necessarily that they’re not going to pay the debt, but that they may only pay half the debt, or some portion. In the U.S., 3 cities in CA and Detroit (surprise) are currently restructuring debt obligations in bankruptcy court. Remember when the U.S. exited the gold standard? That was essentially a default and we paid those countries with fiat currency (paper money).

So, let’s examine Sovereign Debt in context:

Theus Wealth Advisors and the World Public Debt vs World GDP

Everyone over 45 probably remembers the ‘80s – very high interest rates. The defaulted debt per world public debt was pretty large. Yet, the defaulted debt per world GDP is much lower.  Perspective is everything.  In the following graph, look how many times countries restructured, going back to 1800. Some of these were actually going bankrupt!

Theus Wealth Advisors knows about the External Sovereign Default

So…if you remember the riots of 5 years ago over this Greece debt issue, what happened to portfolios?  Let’s take a hypothetical 70 equities/30 fixed portfolio. If you managed to ignore all the hyped news and kept to a disciplined process of being institutionally invested with rebalancing, this was the result of the hypothetical (based on index results) versus CRSP 1-10 (the whole US Market).

Theus Wealth Advisors analyzes the USA Portfolio Vs. CRSP

A $100,000 grows to $176,026 in the portfolio, and the whole market grows to $215,787. Greece still defaulted during this time and their bond holders got half of what was owed! Interestingly, in 2013, Greek equities were up 40+%!  Who knew?! [Disclosure: past performance has no bearing on future performance! Markets are forward-looking.]

The bottom line: Greek equity exposure within our portfolios is .03-.05%, with no allocation in fixed income.  Is it possible that some ‘contagion’ might occur across the Eurozone?  Maybe.  Pundits and ‘experts’ like to talk about the possibility of a global meltdown. If I were president of the EU, I’d kick them out until they get their act together.  However, holding a globally diversified portfolio is still the key to reducing the many risks that occur in the market, including country and currency risks.

SO…from “My Big, Fat, Greek Wedding”:

“How’re we supposed to know what’s going on?”

“I dunno. It’s all Greek to me.”

If you want to ‘know what’s going on’ in plain English, here is the Greek crisis explained in a 2 minute video (scroll to the bottom):   click here

Yamas! (Cheers),

    p.s. China’s having bigger problems….but that’s another story.