As Greece teetered on the brink of financial collapse, Eurozone leaders agreed to give the country up to $96 billion in fresh bailout loans as long as the government of Prime Minister Alexis Tsipras manages to implement a round of punishing austerity measures in the coming days. However, the drama is far from over.
A skyrocketing unemployment rate has reached 25.6% in Greece, including 60% of the nation’s young workers, and a steep recession continue to plague the nation. The Greek economy has shrunk by 25% over the last five years. And, in the last few weeks, anticipating a shift from euros to drachma, or a “Grexit” from the Eurozone, Greek citizens staged bank runs, trying to get as many euros out of the system as they could. With ATM withdrawals restricted to €50 per day and protests in the streets, the Greek Financial Crisis has far-reaching ramifications. The 14 million tourists who visit the country during the summer may decide to vacation elsewhere. Additionally, Greece imports 40% its food and pharmaceuticals and 80% of its energy. The companies the nation relies on are certainly questioning Greece’s ability to pay its bills. So, it’s easy to see that bailout loans alone will not totally improve the situation.
What does all this mean to you as an investor? To lend perspective, First Trust Advisors’ Brian S. Wesbury equates Greece to Detroit, not Lehamn Brothers. That is, while Lehamn surprised markets, Greek financial problems are not new. In fact, economic authors, Reinhardt and Rogoff have calculated that since it became independent in 1829, Greece was in default or rescheduling its debt 51% of the time through 2006. And Wesbury notes that Greece’s most recent crisis started in 2009, so financial markets have had plenty of time to prepare. In contrast, the Lehman collapse was unexpected, as most people believed the government would handle it like Bear Stearns. Wesbury also points out that Greek GDP (approximately $240 billion in 2013) is roughly equal to the Detroit Metro Area’s GDP ($224 billion in 2013). However, the European Union GDP is roughly equal to US GDP. He therefore concludes that the impact on the EU and on the world of a Grexit will be minimal.
Whether we are dealing with fallout from the Lehman Brothers Bankruptcy in 2008 or today’s unfolding drama in Greece, one investment strategy consistently helps us avoid the emotional swings and reactionary trading that are so harmful to long-term returns. I’m referring to disciplined diversification. Unlike Greece, that has put so many of its eggs in the import basket for food and energy, we invest across a wide range of asset classes. That’s because we understand that we cannot predict the future–at home or abroad. It’s impossible to time the market and foolish to try. That’s why we diversify and that’s why our clients are not worrying now about how they must respond to the crisis in Greece.
On a lighter note, the Washington Post recently reported on the opinion gap that exists between what Germany–Europe’s economic powerhouse and decision-maker–felt should be done to handle the Greek crisis and what some economists recommend. The Washington Post then referred to a Monty Python sketch from 1974 regarding a soccer match between Germany and Greece and the disputed offside no-call. Watch for yourself below: