Too small to have a global impact

In what has been arguably the biggest economic fallout from the global financial crisis, Greece has been on tender hooks since the beginning of June with its economy teetering on the brink of bankruptcy. Only all night negotiations with other members of the European Union (EU) on 12 July has saved the country, but for how long has the country been saved?

What does the Greece situation mean for the world economy? And does this mean that investors need to avoid European stocks and bonds? While the whole world has sympathy for the Greek situation, these are some of the questions which have been foremost on the minds of investors.

FAnews caught up with Vaughan Henkel, STANLIB Investment Strategist, to find out what impact the Greek situation will have on the rest of the world.

The global view

It is important to note that this is not the first time a country in Europe has defaulted on its loans following the global economic crisis. Portugal and Ireland were in a similar position in 2010, and needed financial assistance from the International Monetary Fund (IMF). But it is the fact that Greece has so much debt to pay back that is worrying. They already defaulted on one loan payment and were facing another two. Now they have an additional one to pay back after the recent all-night talks.

What does this mean for the rest of the world? “It is important to note that Greece is only 1.8% of Euro zone Gross Domestic Product (GDP) and as such, any direct impact is limited to a sentiment indicator primarily. We believe Greece is too small to have a global impact, but the insistence of the EU that it meets its obligations may be seen as positive for long term EU stability,” says Henkel.

That is if Greece will actually be in a position to be able to do this. The Wall Street Journal is reporting that Portugal is going to be paying back its loans to the IMF early to take advantage of falling interest rates. One wonders if Greece will ever be in this position.

Henkel reports that the EU’s confidence over its long term stability is a result of other Southern European countries seeing first-hand the negative consequences of potential exit. This was shown via the banking shut down and unfolding Greek banking crisis. “The bottom line is, rather have a crisis in a 1.7% section of Europe, which may be contained and provide valuable lessons, than a more material country.”

The way forward

In order to make a decision as to whether Europe is just too risky to place any investments, one needs to look at the way forward for the Mediterranean nation; because if a Grexit ever materialises, they will stare hyperinflation in the face.

“As stated earlier, the new deal increases the risk of a Grexit in the medium term, but may stabilise the balance of Eurozone. Argentina in 2002 and Russia in 1998 may be examples of debt defaults and their consequences and they typically result in inflation of 50% to 190% over a three year period, GDP recovery within three years but this is not certain given the structure of the Greek economy and real disposable income that may not recover within three years,” says Henkel.

He adds that the economic impact is severe and may take more than three years before recovery, if at all, in that time period.

The bottom line

So what is the bottom line for investors? We previously reported that global investment houses were quite bullish about Europe saying that European bonds and stocks were smart investments. However, this was before the fall out. So what strategies do investors now follow when it comes to Europe?

“We do not believe investors will change their investment stance as a result of Greece, but believe that a Greek deal may continue to weigh on market volatility; as Greece has not met any of the previous deal conditions. Furthermore, the deal is significantly worse than the earlier offers and the level of austerity makes it likely that the probability of exit actually rises, in the medium term,” says Henkel.

Editor’s Thoughts:
The position of investors may depend on a Grexit. Investors may only stay in a region as long as there is no overwhelming risk associated with that region. At the moment, Greece is unfortunately anything but a risk waiting to happen. The main benefactors of this may be Asia, which has been the other region of interest for investors. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].

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