Greek tragedy should be contained

Provided by Mercer.

Recent developments in Greece have led to increased volatility in markets and raised concerns about broader implications.

Markets reacted strongly to the weekend news that Greece’s financial system had ground to a halt – global share markets fell on Monday, but have stabilised since then.

The situation is fast moving in political terms and will continue to play out over the next few weeks, beyond the referendum scheduled for Sunday 5 July.

The outcome is impossible to predict and markets will remain wary until there is some certainty on what happens in Greece, so we can expect some volatility over the next few weeks.

However the debt crisis in Greece is expected to be contained and should not lead to a worldwide financial meltdown.

The Eurozone has made significant progress since the 2010-12 “sovereign debt crisis” which really did have the potential to spread across the globe.

  • Most Greek debt is now held by international institutions (IMF and World Bank) and the European Central Bank.
  • The ECB now has a quantitative easing policy in place to help quarantine any negative pressures.
  • Surrounding economies like Spain, Italy and Portugal are now far more resilient to whatever happens in Greece.

Greece makes up only about 2 per cent of the European economy and just 0.3 per cent of the world economy. Australian exposure to Greek government bonds is almost non-existent.

So what happens next?

The outlook for global economic growth is still positive and we continue to favour growth assets, like equities, over defensive assets, such as government bonds.

The latest drama, which could result in a Greek exit from the Eurozone, emerged after Prime Minister Alexis Tsipras announced he would ask the Greek people to decide whether or not to accept a bailout package offered by the country’s creditors.

In response, those creditors – namely the European Commission, the European Central Bank and the International Monetary Fund – rejected the Greek government’s request for more time to pay its debts.

They also cut off an emergency assistance package that had been keeping the Greek banking system afloat for months.

A Greek exit from the Eurozone, if it eventuates, may actually strengthen the Eurozone by removing the ongoing uncertainty.

If you have any questions of how this could impact you, we’d be happy to explain. Don’t hesitate to ask us.


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