THE GREEK DEBT CRISIS

Greece is in the headlines regarding its position within the European Union (EU) and its ability to pay its July 20 bond payment.

 It’s important to keep Greece’s economic impact in perspective and to note that the risk of a Greek default in terms of its broader economic impact is reduced today relative to prior flare-ups of this question (though not eliminated, of course). As economist David Rosenberg wrote in his June 16, 2015, “Breakfast with Dave” column, “Remember that we are talking about a $240 billion economy here or 2% of the eurozone GDP [0.3% of global GDP].” Moreover, more than 80% of the total €315 billion Greek debt is held by government-related/taxpayer-supported entities, such as the ECB, International Monetary Fund, and the European Financial Stability Facility, according to data from Capital Economics.

 From a financial standpoint, these entities could handle a default although there would be political ramifications (just as there will be ramifications if Greece is bailed out again). Only 18% of Greek debt is held by the private sector and private banks, which is where the potential for financial contagion was a big concern just a few years ago. What’s more, these private sector-held bond maturities don’t start coming due until at least 2017. As such, according to Capital Economics’ June 16 European Economics Update, defaulting on this privately held debt would provide minimal benefit to Greece’s overall debt financing burden, yet would adversely impact the Greek banking sector, and so “for these reasons the Greek government has pledged that it will not default on its privately held debts.” In his June 18 column, Rosenberg also highlights some other key differences between the risks stemming from a Greek exit now versus a few years ago. “This is not 2010, nor is it 2012, when there was no ECB quantitative easing, when the peripheral euro area economy was far weaker, and the banks were saddled with Greek debt on their balance sheets.”

 The general theme of the Greece financial situation is not that it isn’t important, it is.  The impact this has on the EU  is a scenario that we continue to watch closely.  However, the Greek economy itself is a relatively small portion of the EU and even a dramatically smaller portion of the global economy.  Furthermore, most of its debt is held by public institutions which can handle a default.  Financial crisis happen and is part of the global landscape.  The goal is to focus on the long-term and adjust the portfolios in light of the long-term forecasts.  European stocks continue to look attractive relative to their domestic counterparts with a  similar risk profile.