greek crisis

The financial crisis in Greece is once again in the headlines, as a loan of about $1.6 billion from the International Monetary Fund (IMF) comes due on June 30. While negotiations over the weekend have resulted in some progress toward a deal, it is still quite possible that a breakdown could occur, resulting in a default on Greek debt and a possible exit from the euro currency.

Predicting the likelihood of a so-called “Grexit” has become a blood sport among commentators and strategists in the financial media. Experts are all over the map regarding the likelihood of Greece exiting the euro and, importantly, what the fallout might be across global financial markets. Although in economic terms Greece is about the same size as San Diego, the impact on the confidence in the “eurozone experiment” may be severe. We have no unique insight as to the probability of such an outcome, but as risk managers, we must consider the potential impact on client portfolios under a worst-case scenario.

Greece’s creditors (largely the ECB, the IMF, and other entities backed by other European governments) are insisting on more austerity (through higher taxes and additional pension cuts) in order to bring Greece’s fiscal deficit under control. Th e Greek government, on the other hand, believes that any further austerity will bring undue economic hardship to the Greek citizens and is resisting any further cuts.

Concern over the Greek situation has led to large outfl ows of euro deposits (totaling 100Bn euros since 2009) from Greek banks. Outfl ows have accelerated in recent days as the crisis has escalated. The great fear is that continuing deposit outfl ows from Greek banks will cause the country to impose capital controls which would limit or bar additional withdrawals and/or wiring of funds abroad, thus crippling the Greek economy.

In the event that Greece does default and exits the euro, the impact on the Greek economy would be swift and severe. The IMF predicted in 2012 that the reintroduction of the drachma as Greece’s currency would result in a 50% plunge against the euro, an infl ation rate of 35%, and a drop in Greece’s already anemic GDP by 8%. For these reasons, the Greek population remains overwhelmingly in favor of staying with the euro.

Beyond Greece itself, the potential fallout from a Grexit on the global economy is harder to predict. In the event of a default, here are some possible financial market implications:

  • Short-term financial market instability, particularly in Europe, as concern spreads about the wider implications
  • Slowing growth in Europe, including the possibility of a recession
  • Declining interest rates in Northern European countries (e.g., Germany, Switzerland), with higher rates in the peripheral countries
  • Destabilization in the European Union, including the heightened risk of a larger country following suit, and concerns that other eurozone countries may turn to Russia for support
  • Capital controls in Greece coupled with a sharply devalued Greek currency and much higher infl ation
  • Higher taxes in European countries to rebuild reserves among central banks stung by losses on their Greek debt
  • Possible flight to quality, resulting in inflow to U.S. dollar-based assets, lower interest rates in the U.S., and strength in the USD
  • Delay in the FOMC’s timing for raising interest rates in the U.S., as they seek to calm nervous markets

If Greece reaches a deal with its creditors, the most likely outcome is simply to postpone the timing of the next crisis. Without a significant increase in Greece’s economic growth rate, it is unlikely they will ever be able to grow their way out of their debt problem.

From an investment strategy standpoint, we have remained significantly underweight in European equities in part because of the possibility of a Greek default. We continue to believe that is a prudent approach, despite a likely short-term rally if a deal is reached. If the talks collapse, we would expect a “risk-off ” environment to benefit our investment-grade taxable and-tax exempt bond holdings. In the anticipation of increased volatility in financial markets should a default occur, we have increased our allocation to liquid securities in both our domestic and international fixed income portfolios and are holding above-average cash allocations in both equity and fixed income strategies.

Importantly, we view any market disruption caused by a potential Grexit to be relatively short-lived and not the trigger for some broader global financial crisis. As a result, we hope to take advantage of any market weakness by opportunistic purchases in selected asset classes.

Investment and Insurance Products: 
• Are Not insured by the FDIC or any other federal government agency 
• Are Not deposits of or guaranteed by a Bank or any Bank Affiliate 
• May Lose Value

 

Important Disclosures

This presentation is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein.

Certain statements contained herein may constitute projections, forecasts, and other forward-looking statements, which do not reflect actual results and are based primarily upon a hypothetical set of assumptions applied to certain historical financial information. Certain information has been provided by third-party sources, and although believed to be reliable, it has not been independently verified, and its accuracy or completeness cannot be guaranteed.

Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as of the date of this document and are subject to change.

There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.

There are inherent risks with fi xed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall.

Investments in below-investment-grade debt securities and unrated securities of similar credit quality, commonly known as “junk bonds” or “high-yield securities,” may be subject to increased interest, credit, and liquidity risks.

Investments in emerging markets bonds may be substantially more volatile, and substantially less liquid, than the bonds of governments, government agencies, and government-owned corporations located in more developed foreign markets.

Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.

As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money.

Investing involves risk, including the potential loss of principal. Past performance is no guarantee of future results.