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Portfolio Strategy – Greece Update

Greece is in the headlines again as the indebted country struggles to meet liability ayments due to creditors. For a country representing less than 0.4% of world GDP, the country has garnered an inordinate amount attention. The primary reason relates the countrys membership in Europes monetary union and fears around the economic fallout should the union fail. Here is a summary of the current situation:

-Greece represents 0.39% of the world economy with $242B in GDP, slightly larger than the state of Oregon.

-The country is being governed by Syriza, a left-wing coalition party led by Alexis Tsipras who came into power in January 2015 with an anti-establishment/anti-austerity position.

-Greece has a debt payment of $1.7 billion due to the International Monetary Fund on June 30th and to the European Central Bank totaling 3.5 billion on July 20th

-Creditors have been demanding tough reforms in order for continued financial support.

-To the surprise of negotiators on both sides, Tsipras called for a Greek referendum to be held on July 5th on whether the country will accept the latest offer from creditors. Tsipras is recommending Greek citizens vote No, while Eurozone leaders have indicated the referendum reflects Greeces decision as to whether it will remain in the Eurozone.

-Polls have suggested an interest of the Greece populace (66%) to remain in the Eurozone, but the outcome of the vote is highly uncertain.

-An exit of Greece from the Eurozone calls into question the viability of Europes monetary union. However, Germany, France and others within the monetary union remain firmly committed to the Euro so fears of impending collapse appear overblown.

-The majority of Greeces debt is owned by the IMF and ECB, a different dynamic from a few years ago when much of the countrys debt was owned by European and foreign banks.

-Uncertainty in Europe may encourage global central banks to continue providing policy stimulus until clarity is achieved.

-Further negotiations between Greece and its creditors are possible between now and the referendum.

-Eurozone policymakers have taken steps to prepare for a countrys exit and prevent contagion. The ECB will be buying assets to stabilize market conditions, especially in more vulnerable countries.

-As with prior European crises in recent years, market and political turbulence has been required toget policymakers to overcome domestic opposition and make tough decisions.

-Most clients will have very little exposure to Greece. The following table illustrates exposure within Hefren-Tillotson discretionary portfolios, which totals less than 0.2% of assets.

7.2.15 Greece

The Bottom Line

As of today, the situation is fluid and we are not sure exactly what will happen. There are three potential outcomes that we see as a possibility:

1. Greece remains in the Eurozone as a result of either acceptance of creditor terms or a temporary compromise that buys the indebted country time. Volatility will likely subside under this outcome and the market would return to the status quo.

2. Greece exits the Eurozone but the impact outside of Greece is contained and temporary. Volatility would likely be high over the short-term but strong responses from global central banks and European policymakers would likely limit losses and potentially prolong the bull market. The longer-term implications of a Greek exit are hard to predict and may depend upon how the economies of remaining Eurozone countries and an independent Greece perform after the breakup.

3. A Greece exit from the Eurozone has unanticipated consequences and triggers a global bear market. This seems unlikely at the moment since policymakers have for several years been preparing for this possibility and market indicators are not signaling alarm.

In the end, we do not see the Greece situation as a reason to depart from your long-term financial plan or abandon the basic building blocks of your portfolio.

DISCLAIMER: Past performance does not predict future results. This report is based on data obtained from sources we believe to be reliable. Hefren-Tillotson does not, nor any other party, guarantee the accuracy or completeness of this report or make any warranties regarding results obtained from its usage. All opinions and estimates included in this report constitute the firms judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation to buy or sell the securities herein mentioned.

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