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No Time Left for Greece

July 2, 2015

 

After months of fruitless negotiations to restructure a financing agreement, the bankrupt Greek government has failed to make the €1.5 billion payment to the International Monetary Fund (IMF) on June 30th. This makes Greece the first developed country to miss a payment to the IMF. As a result, their debt is now in arrears and is risking default. The Greeks also have to redeem bonds payable to the European Central Bank (ECB) in July and August totaling €6.8 billion.

 

On one side you have Greece's creditors: IMF, ECB, and the European Union (EU). They want Greece to reform its ballooning pension and social security spending, as well as increase tax collection before any future financing, debt restructuring, or debt forgiveness occurs. On the other side, we have Greece's newly elected government, the far left Syriza party, led by Prime Minister Alexis Tsipras. The Syriza party won the majority back in late January riding the wave of anti-austerity sentiment across the country. The majority of Greece want austerity measures to end, forgiveness on a portion or all of their debt to the IMF and ECB, keep entitlement spending as is, and to remain in the European Union all at the same time.

 

With both sides resisting to budge since February, there appeared to be a glimmer of hope for a last minute deal over the weekend. However, like a cruel reenactment of this year's Super Bowl. With the ball on the one yard line, Tsipras passed on negotiations and walked away. Instead, he has called for a referendum by the people, to see if they wish to accept a new bailout or fight the austerity measures. The referendum is currently planned for July 5th. Currently, it is predicted that the country will most likely vote against a new bailout and austerity. In fact the Greek government is actively campaigning to motivate its people to vote no. However, since Greece missed the payment to the IMF, capital controls have been put in place. Citizens are only allowed to withdraw €60 per day, and the flow of credit has been restricted. Leaving Greece and her people in a tight spot against the rest of the European Union.

 

There are essentially two outcomes from this fiscal standoff. In the event the people vote yes for the bailout or Tsipras accepts the European Unions demands. Greece would be able to make their payments through additional funding. Greece will have to reform entitlement spending and improve tax collection. They will also have to pay the additional bailout back in the future but, they would remain in the Euro-zone.

 

If the people vote against a bailout and austerity measures, then what happens next is anybody's guess. Negotiations will have to restart again with the ECB, IMF, and leaders from the rest of the European Union. If a deal doesn't materialize and Greece misses a payment to the ECB, it leaves open the possibility of Greece exiting the EU. Oddly enough, Greece and her people don't want to leave the Eurozone and neither does the EU itself. This would be considered a blow to the European Union experiment. Not to mention the rest of the EU would like their money back. Therefore the possibility of Greece exiting the EU is far less likely outcome. Additionally, in a recent report, the IMF acknowledged that Greece's liabilities are unsustainable, their debt needs restructuring, and would realistically not be able to pay back the loans for three years. Which is a good sign for a potential compromise in the future.

 

What does this mean for you, and will it affect your portfolio? As a Matson Money investor with a globally diversified portfolio, your international equity allocation has very little, if any exposure to Greece (depending on your risk tolerance). In the average portfolio, Greek equities represent only 0.05% of your total international equities. Regardless of your risk tolerance, you are not invested in any Greek bonds. As Matson Money investors we know to buy and hold equities long-term and rebalance using short-term high quality fixed income. Greek bonds are now considered junk bonds and therefore would not be included in your portfolio.

 

You will see some volatility in the market over the next couple of weeks. However, no matter what happens in Greece, it will barely affect your portfolio. Especially over the long-term. To put this situation in a larger perspective, over the past 90 years, there have been over 80 countries that have defaulted or had to restructure their debt. In fact, over the same time period, there hasn't been a year in which at least one country wasn't defaulting or restructuring their debt. In the end, Greece will turn itself around eventually. However there is no need to dwell on Greece's problems or be concerned about how it could affect your portfolio in the short term.

 

 

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