Greek Financial Crisis- Nothing New

GreeceGlobal stock markets fell sharply Monday. Investors don’t like uncertainty and that’s what this latest Greek financial crisis is providing. Can they avoid a full-blown default? Will there be a ‘Grexit’? Will it stay in the euro zone and keep the single currency?

The current Greek crisis has had many deadlines that have come and gone without any changes. Today, Greece is due to make a payment of $1.7 billion to the IMF for partial repayment of a bailout agreed to in February 2012. This Sunday, the people of Greece will vote on a referendum to accept or reject the austerity measures demanded by its creditors in exchange for further aid. Prime Minister Alexis Tsipras has encouraged the populace to vote “no” in order, he thinks, to try to negotiate a better deal with the country’s lenders. On July 20th, there is a $4 billion payment owed the ECB and then August 20th another $3.6 billion due the ECB. It will likely be a tumultuous next seven weeks for Greece and its citizens.

This is nothing new for Greece. Depending on your chosen starting point, this is year five or year 2600 of the Greek financial crisis.

  • Ancient Greece invented finance including banking, personal loans, capital levies and annuities. Back in the 6th century BC, according to Josh Brown in The Reformed Broker, they also invented the first financial crisis in recorded history. Greek citizens, en masse, had pledged themselves as slaves as collateral for debts they took out against their farms. Ultimately, much of the population was enslaved, both in the country or shipped abroad. The wiseman Solon solved the crisis by freeing his fellow countrymen from slavery by devaluing the drachma by one-quarter.
  • The banks of the day, which were the temples, generally did not lend to the city-states. However, the Shrine at Delphi and its Temple of Delphi made 4th Century BC loans to 13 Greek city-states and ended up taking an 80% “haircut” when the majority of them never paid back their loans.
  • Since Greece obtained its independence in the 1820s, it has been in default to its creditors roughly 90 of those years; about half. They defaulted in 1826, 1843, 1860, 1894 and 1932. In the late 1800s, the Greeks once again ended up under an unsustainable debt burden and the government suspended all payments on external debt in 1893. At that time, they created the “International Committee for Greek Debt Management” to appease foreign creditors. Sound familiar?
  • There are no countries in the modern world that have defaulted on their loans more often than Greece, except for Honduras and Ecuador.
  • The current financial drama began in December 2009, when credit rating agencies first downgraded Greek debt. Then, in May, 2010, there was a $146 billion rescue package loan, tied to a severe austerity requirement. The austerity program and rescue package failed and in October 2011, debt was restructured, with a 50% haircut.

That brings us back to today where Greece and the rest of Europe are at a nasty impasse. The odds of deal failure are quite high and ‘Grexit’ has become a real possibility. How bad would it be if Greece left the European Union? Maybe, not bad at all.

The world is ready for it:

  • More psychologically prepared than in 2009/2010 when the fear of contagion was very large.
  • More financially ready. Today, Europe has embraced its versions of QE- “whatever it takes.”
  • More economically prepared. Growth in the U.S. and Japan are doing much better. Parts of Europe are making progress. China keeps moving forward.
  • Removing this uncertainty could help the Eurozone. Some say that if Greece would leave, the bloc would be stronger. They call it the “ballast theory”- comparing the bloc to a hot-air balloon which would rise once Greece has been thrown overboard.
  • Contagion is always a risk, but probably not the risk it was when this all started.
  • Having a template for a country to leave the euro is likely a good thing.

Greece has a great cultural heritage. It has given the world some very important things. It’s a wonderful place to visit. Unfortunately, finance has not been its strong suit. Greek’s economy is about the size of Atlanta, Georgia. The world is prepared if there is a ‘Grexit’. Of course, no one knows how this drama will play out. Yet, everything should be fine with the exception of the volatility that this uncertainty brings to the stock markets.

We just need to stay focused on what we can control, particularly having a well-balanced and diversified portfolio consistent with our risk profile and staying invested.

Finally, we need to be ever grateful for being Americans and being able to celebrate our great country on July 4th. Happy Independence Day! Have a fun and safe weekend!

American flag flying in the wind