You may have noticed recent financial headlines regarding the European Union and the inability of the country of Greece to repay their debt. Our clients continue to question, “Why does it matter to us in the U.S. if Greece defaults on their loans?” Greece has a Gross Domestic Product (GDP) of $237 Billion,* which is only half of the GDP of our Great State of Michigan at $449 billion as of 2014.** “Why should my investment strategy be impacted by such a small country? Greece has many great achievements in the history of the world, but why is it such a significant part of the current economy?”
I believe the answer is the same one we could have given to clients regarding the failure of Lehmann Brothers back in 2008. It was a relatively small investment bank, compared to the huge players in the world economy, but Lehmann Brothers’ bankruptcy triggered a series of events no one had considered. Investors can buy Credit Default Swaps, which are purchases of debt of a corporation or country and act similar to insurance policies. These “insurance policies” pay the investor full value of the debt obligation in the event of default by the issuer. In the case of Lehmann Brothers, AIG had written the Credit Default Swap years before; at a time when Lehmann Brothers had a decent credit rating and long before the large financial institutions starting taking crazy risks like they did in 2007 and 2008. Lehmann Brothers played only a small part in ruining the financial system. To pay off each investor in full, AIG, the company writing the Credit Default Swap on Lehmann’s debt, then had to fork over billions they didn’t have. This forced AIG into bankruptcy also, and a few other large financial firms wrote insurance policies on AIG’s debt. Short story long, it is the domino effect that forces the U.S. to consider what the tiny country of Greece is doing. We don’t know who will be left holding the bag if Greece ends up going bankrupt.
It is my opinion that Greece will never be able to repay their loans. They can’t even pay out their “Social Security” without getting more funds from the Eurozone. Their banks would immediately shut their doors if the International Monetary Fund decides to close their credit facilities. Even if Greece agrees to the austerity measures put upon them by the European Union, it will be like trying to fix a crack in a dam with duct tape. Eventually, Greece will have to restructure their debt. No one wants this to happen right now, because it would be more beneficial to those involved if this occurred when the global economy is in better shape than it is today.
The psychology of investors plays a huge role in determining how investment markets perform. Fear and greed motivate most decisions made in the markets. Let me encourage you to have a long-term game plan in place which allows you to adjust for extenuating circumstances in real time. Work with your financial advisor to develop a financial map. Having a direction will help you with your own personal psychology and allow you to sleep well at night knowing that if situations arise like this recent Greek Tragedy, you’ll be prepared.
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