Today’s blog is a summary of an alert prepared by Broadridge Investor Communication Solutions, Inc. dated July 10, 2015 titled “Understanding Greece and the European Debt Situation”. https://www.foremostadvice.com/AdvisorProcess/PrintVer.aspx?iplf=ai&iptc=127411 As you have heard on the news and the internet in the last few weeks, Greece has defaulted on its debt to the IMF (International Monetary Fund) in excess of $260 billion.
How did this happen?
In October 2009, the government of Greece admitted that it had understated the nation’s deficit.
Interest rates on Greece’s debt spiked and the government could no longer borrow from investors.
They were bailed out by the ECB, IMF and EC who required austerity measures to stabilize Greece’s finances in the spring of 2010.
Unlike Portugal, Spain and Italy, Greece’s economic problems did not improve.
GDP has shrunk, unemployment rose above 25%, debt-to-GDP ratio climbed above 170%. Greece defaulted.
On July 5, 2015, the citizens voted “no” to any further austerity measures by the creditors.
What happens now?
Greece and its creditors could reach an agreement which would provide bailout funds and allow banks to reopen. The Greeks would have to accept more austerity measures.
If no agreement is reached, the Greek banks would run out of Euros and the government would return to printing their own currency, the Drachma. Greece would exit the Eurozone. Drachmas would be worth less than Euros, so an instant devaluation of people’s savings would occur. Inflation would soar.
What effect, if any, on US investors?
It is unlikely the US markets would suffer any long-term negative effects due to the Greek crisis.
However, the uncertainty and volatility of the markets currently, could have a short-term effect on portfolios.
In summary,
Greece is at a tipping point again in their economy. Will they get bailed out again or will they move in a new direction? Stay tuned this week, as talks continue.
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